Managing your finances, all your monthly bills and accounts, is an important part of being in a better position to improve your chances of being approved for a loan. It also is something to maintain once you are approved for a loan and need to begin making payments.
You may have shown affordability to repay the loan on paper, and on paper it looks good, but reality can be a different matter. You now need to begin paying the loan and you now have an extra/new outgoing each month.
Money management is important in many aspects of our lives, it also has many facets to it. You need to watch your cash flow, and know where your money is going. You need to make sure priority bills such as the rent or mortgage, council tax, electricity, gas, etc, get paid on time. You also need to make sure your other accounts, such as loans, credit cards and the such get paid when they are due.
The starting point is a budget.
The foundation of any good financial plan is a budget or spending plan. The problem with many budgets is that they don't work. And sometimes, it isn't the budget's fault, it's our fault.
Creating a budget is easy, living and sticking to it is the hard part.
You sit down with pen and paper, write own all your income on one side of a piece of paper, and list all your outgoings, bills, and expenses on the other side of the paper. Then you do the math and see if you are in the red, or in the black. Being in the black is the good colour, red is bad.
However, these are just numbers on a piece of paper, you have not lived this budget yet, or brought it to life.
So you place your budget under a magnet on the fridge and go about living your life/month.
At the end of the month you look at your bank account, see what has been spent, and for some odd reason, the numbers don't quite add up to the "pen to paper" budget you created.
Not so odd at all, budgets such as this don't work.
Let me share with you a way to create a spending plan, a plan unlike any other, and over time, it will be one that works.
Step one involves a person or household tracking all of their expenditures for a couple of months, maybe a few months.
This basically means writing down and tracking, putting pen to paper of all the expenditures one has for a month on a daily basis; sounds easy and difficult all at the same time. But by doing this, you are getting a visual of where all your money is going and you may see or note some areas that can be adjusted or changed.
You keep a small notepad with you at all times... oh, and also a pen.
However, in these mobile, smart phone, times, there are mobile applications you can do this with as well.
If you put £15 petrol in your car, you jot down or enter £15.
If you buy lunch out and spend £5, you write down or enter £5.
So if you are honest in your tracking your expenditures, it is a very real, concrete thing to see. So in essence the tracking becomes a concrete tool to effect a change in your behaviour with your money. Now that's a lot to write, let alone say to someone.
A good example of a financial eye-opening experience is in this example:
Let's say you buy your lunch out each day, and you always opt for the meal deal and only spend £3.
You work 5 days a week, so 5 X £3 = £15 a week.
We will use 48 weeks of work as there are various bank holidays, and time away from the office.
48 X £15 = £720 spent on lunches a year.
If you are OK with that figure, fine.
If the amount surprises you, or you are trying to save money, or pay down a debt, the spending plan just showed you a way to free up some additional cash. Cut the lunches down and you could save £350 to £500 a year.
This step is where we review all our expenditures and look at what it is going to cost us to live for a month. Basically, we are creating a "budget" just like we discussed at the beginning of this chapter, one of those budgets that doesn't work.
This means we sit down at the beginning of a month and write out all the expenditures we know we will incur that month, rent/mortgage, council tax, petrol and all the other things we have seen we are spending money on based upon our tracking.
We also then write down what we feel our wages or household income will be for that month. For many of us this is easy to know as we are salaried or work the same hours each week and month.
Next is to see how we fair between the two, income and expenditures.
Is there enough income, are we experiencing a deficit, and have we in the past been making up that deficit with credit? Or are we showing a surplus, a surplus is always good.
The last part of this step is to live our life, live out the month tracking our daily expenses as we had prior, either using a pen and paper, or some other means, mobile application, or whatever means works for you.
This is bringing it all together, the pre-planning, the living of our month, and the beginning of next month.
At the end of the month we review what we have tracked and look to see how it compares with what we had predicted the month to be like. We need to look at any changes in expenditures, did we spend more in one area than we had thought we would, why was that, can we even figure out why?
Did we have expenditures arise that we did not know of or forgot to list at the beginning of the month? Was there someone's birthday we forgot to include in our monthly expenses, or some other unexpected expense?
This will also allow you the opportunity to adjust or hone the next month's plan to try and be more efficient and knowledgeable of where we are spending our money.
Many of us today have "gone green", meaning we do not get statements from our banks, or for our credit cards or other accounts. While this does a lot for the environment, and also saves banks money, for some it may make it more difficult to review statements.
The best part of going green is that your statements are in one convenient place, and the banks keep these statements for years.
As to how long you should keep your records, if you are self-employed HMRC is going to expect you to keep your records for six (6) years.
Wage slips and P-60s should be kept indefinitely.
And if you have gone green, your bank and credit card statements will be available from your bank for up to six (6) years. If you did require a hard copy of a statement, you can either print it off online, or you can go into the branch and the bank will print you a copy.
Keeping statements and records of our finances is important. You may need to show documentation later on if you are applying for a loan.
It can not be stated strongly enough the importance of paying your bills and accounts on time. As we saw, payment history makes up 35% of your credit score. By paying accounts late, you do severe damage to your credit score.
By using Direct Debits and standing orders, you can ensure that bills are paid on time and by their due date.
Having the correct due date will also ensure bills are paid on time. Having due dates that are prior to your payday can cause issues as you have to make sure the money is in the account.
If you are paid on the 25th of each month, having due dates after this date is the practical way to ensure payments are made. Most creditors and others will allow you to change your due date if you have a due date that is an issue.
Having a savings account, and regularly putting aside money into the account not only helps build up an emergency fund, but the pattern of saving can help later if you are looking to rebuild your credit.
Setting up an automatic payment into a savings account, even if it is just £25 a month, is a start. Some credit unions have automatic withdrawals to pay into an account with them. By having the money taken out off the top, you're less likely to notice it.
Remember, if you are paying into a savings account, only to have to use it each month, you're not saving. You may want to review your budget or spending plan and see where you can make some adjustments.
As to how much one should save, as much as you can.
Not all financial experts agree on how much we need for savings.