Financial Planning

Inflation is a term which you may be familiar with, but it’s crucial that you make sure you fully understand what it is.

Inflation is about the buying power of your cash. When inflation goes up, the buying power of your money goes down. It reduces the ‘value’ of your money.

The government publishes figures for inflation, but the problem is that they take some ‘artistic license’ with the accuracy. For a government with massive debts, it’s in their interest to reduce the value of those debts by decreasing the value of currency.

Say you owe $100, and inflation one year goes up 100%, it effectively means there is twice as much money around as the year before. This means you would need twice as much money to buy the same thing. A loaf of bread which cost $1 a year ago, would now cost $2. Assuming wages also went up at rate of inflation then you might think this shouldn’t pose too much of  a problem. But what of the $100 debt you had? It’s only going to cost you half as much to repay. Great! you might think, but then what happens to your savings? Those are only worth half as much as they were before! The actual number is the same, but the buying power has reduced, so the ‘value’ of the savings has gone down.

So, do you think the government want you to be fully aware of how much the value of your cash is going down by? Of course not. That disappearing value is contributing greatly to the national debt reduction thank you very much. It’s basically a hidden tax.

Quantitative easing

So how does the government make this happen? Ever heard of the term ‘quantitative easing’? What it means is, the government prints lots of new cash, reducing the value of the money in your pocket. Increasing the supply of money also reduces interest rates and encourages banks to lend money, stimulating the economy.

All this means that holding on to cash is perhaps not such a good idea. If the value of the money is going down, and interest rates are low, then you are not likely to make back in interest what you lose from inflation.

 

Budgeting isn’t the most glamourous or exciting thing in the world, but it’s something that you, really need to do! Creating a budget will give you control over your money, rather than the other way around. If done diligently, it will help you create a surplus of money to set aside every month, which you can then use to build a wealthy future.

Seriously, before you do anything else, commit to getting a budget done first.

Free budget template

Attached to this page is a template in xls format, that you should be able to open in Excel, or Google Sheets. It’s set up so you break your regular outgoing payments into either weekly, monthly, or annual payments. This means it will accommodate everything from what you spend at the cafe every week, to monthly rent and taxes, to annual bills such as home insurance or car repairs, and automatically calculate the daily, weekly, monthly, and annual amounts.

Basically, you just need to fill in the green boxes (there are a couple of pre-filled values which you can edit), and the spreadsheet should take care of the rest.

I would suggest that for annual payments, you look at how much these are costing you per month, and set up another account with your bank Use this to automatically transfer the total monthly cost for these annual payments into the separate account. For example, if your annual payments total 1200 pounds, then you’d want to transfer 100 pounds per month into this account. This allows your budget to cover those larger, infrequent costs which can otherwise ruin your finances for months!

Be as thorough as you can. You really want to try and cover everything. I would suggest going back at least 3 months of your bank and credit card statements to ensure every payment there is covered somewhere on the budget. Personally, I have a monthly entry which covers purchases for the home, and for eating out, which acts as a catch-all for a lot of items.

Budgeting books on Amazon

Making some adjustments

Once you’ve completed your budget, you should have a good idea of exactly where your money is going, and you can see how you’ll be able to make small changes, and how that might allow you to start setting some money aside for creating wealth.

Surprised how much you’re spending on groceries? Perhaps you can cut down on expensive brands, or cut back on the wine. Go down the list and ask yourself if you could possibly save. Utility bills and TV subscriptions are the kind of things that might seem an easy target, but if you’re really serious, you should consider things like rent and mortgage payments too. This is a time to seriously examine every aspect of your life and decide what changes can be made so you can prepare for a wealthy future.

Resources

Budget Spreadsheet

Update

I wanted to share an update which illustrates just how important budgeting is. A friend of mine started to budget his finances properly in May, and shared with me his credit card statements for the last year. All of his grocery spending and money that goes on home improvements, and going out with his family goes onto his credit card. Once he had set a value which he could stick to for groceries, home improvements, and going out every month, he calculated his previous 11 months credit card statements based on this value.

The table below shows the percentage of the budgeted value spent. Say, for example he had budgeted 300 for groceries, 200 for home improvements and 200 for going out, then 100% of his credit card budget would be 700 pounds. For these values, April, for example, he actually spend over 1400 (204% of 700 pounds). You can see in June 2017 he only spent 92% of his budget. It goes to show, that if you don’t have a target to aim for, then the result is always overspending! As soon as he set a target, he was able to meet it straight away. He said doing this made him aware of just how much he was spending, and allowed him to prioritize things and cut out waste.

On average, the amount he spent over the new budget is 222% over the last year! That’s a lot of money which could be going into an ISA, for example.

92%	June 17
159%	May 17
204%	April 17
111%	March 17
285%	February 17
353%	January 17
244%	December 16
206%	November 16
198%	October 16
191%	September 16
208%	August 16
286%	July 16

 

Let me say something about retirement; it’s a trap! If you’re planning your life in such a way where you get to 65 and then retire and live off your savings, then do one thing, ask yourself WHY?

Why do we have this idea of working until we are 65 and then stopping? Most often it’s something which is so ingrained into our psyche from an early age, we don’t even think about it. It was never something that we planned, just accepted that that’s the way of the world. Think about that for a second. We tell ourselves that at a certain point in our lives, we are going to be old, we are no longer going to be productive, that we are going to start just wasting away. We often even believe that we’re lucky if we make it to retirement and have some time left to ‘relax’. We spend our entire lives with this little program running in the back of our minds, which is never questioned, yet has such vast implications to our physical, mental, and financial well being!

I’m approaching 40 now, and I realised that I have this deep set belief in my mind that I’ve not got long before I start ‘getting old’. I asked myself why I should accept and keep this belief? I was actually planning my life around this fictitious and arbitrary idea, without even considering it.

 

So, I’m doing myself a favour, and getting out of this mindset that I’m going to ‘retire’, that my body will start to give up at a certain age. I want to have some optimism about the future, and what opportunities it will bring. I look forward to being fit, healthy and productive, for a long time to come!