I spend a large part of working day getting elbow deep in peoples finances. I work in homelessness prevention and one of the biggest problems we are currently facing in the housing sector is how many people are struggling to meet the costs of their accommodation. It’s all lovely for those of us how are fortunate enough to be able to have which investment platform offers the cheapest trades, but for a large proportion of the population making rent each month is far from guaranteed, never mind having anything left over for savings.
Whilst there are large numbers of families for whom their income is simply not sufficient to cover their basic essential expenditure, there are those families who could manage financially, or at least could manage an awful lot better, but who have never been given any kind of financial education. Think about it; I went to primary school, secondary school, 6th Form college and 3 different Universities as I made my way through a fun but very expensive education. Not once did I ever have a lesson that taught me how to compare mortgage rates. Or how stamp duty works. Or how to judge if the up front tenancy costs a landlord or letting agent are trying to charge me are reasonable. I was never taught how to do a household budget, how credit or finance agreements work. And I never once, not in all of the 21 years I spent in full time education, had a lesson on what to do if you get into trouble with money or debt.
I was fortunate that my parent s taught me a lot of that, and a natural discomfort with debt helped with the rest but what about people who don’t have family to teach them? What if your family is not good with money, because nobody ever taught them?
A lot of the families I work with struggle with their finances as they are not confident identifying what their priorities should be when cash gets tight. I don’t mean that in the nasty, stereotypical, tabloid way, which assumes low income families are spending all their benefits money on online bingo and Iphones. I mean when pretty much every letter that drops through the door has that scary red writing on it, and the words ‘Final Demand’ staring ominously up at you – how do you know where to start? Who do you pay when everyone wants paying?
Work out what makes everything else meaningless.
This is my basic rule for working out what order your priorities should be in. It works for most things, really, but money in particular. Lay all your bills out in front of you. Don’t get overwhelmed by it, just take a cold hard look at who is looking back at you. Not the biggest number, not the scariest demand. Which one, if you don’t have it, means that having all the other stuff stops being an issue. I guarantee this rule will put housing at the top. Rent or mortgage. If you don’t pay these, you can lose your home and, if you don’t have a home, paying the gas bill means nothing. Paying your phone bill means nothing if you have nowhere to live. Paying off the credit card doesn’t help you if you are homeless. I don’t mean to bang on but really, when you are in any doubt, please repeat this mantra – Aint Nothin’ More Important Than The Rent.
If you have a roof over your head, then you can start to make inroads with the other debts. As long as you have a roof over your head, the bailiff can turn up and take every single other thing you own, and you will still be able to lock the door safely behind him, sleep on the floor and start to fix things tomorrow. Everything is harder when you are homeless and, as I see with my customers every single day, once you become homeless, getting back under a secure roof is so much harder than keeping one you already have.
From there, you can continue to order your bills and debts, based on which ones will have the biggest impact if you don’t pay. For this, its important to really understand consequences. If you don’t pay your Sky bill, they can cancel your subscription and potentially take you to court for any outstanding monies. If this happens, the court will look at your income and, if you request it, they can order that a repayment plan be agreed which allows you to clear the debt in affordable installments. So, worst thing that happens if you don’t pay the Sky bill is that you have to pay it, and some costs, over an agreed period of time, and you wont have Sky anymore.
However, if you don’t pay your council tax, they can take you to court and apply for an attachment of earnings. This means that money can be taken directly from your wages before you are paid. Depending on how much you owe, they can also apply for any property you own (including the home you are living in) to be sold in order to free up cash for the debt. This isn’t a common approach but it is something that can happen, so it is important to understand that not all creditors are created equally and thinking about who has the power to make life hardest for you is a good way to clarify who should get paid next.
Work out what you can afford.
This one is another piece of advice that sounds obvious but I regularly see people who, in a mix of panic and good intentions, promise repayment amounts they are never going to be able to sustain. If you do a realistic budget and it turns out you only have $25 a month left after your regular expenses have gone out, you cant promise to pay $50 off your debts – you’ll be in a deficient from the off and you’ll either have to default on an agreement or run up new debts by not paying other bills to free up cash. Be honest with yourself and the people you need to pay.
Have a written budget, and include everything. This will help you not only clarify what your spare cash situation is like, but will also throw up areas for potential savings to be made. Once you know what you have left each month, make an offer of repayment to each creditor, starting with the ones we have identified as most important. If you are in real trouble with your rent or mortgage, speak to your other creditors, advise you are at risk of loosing your home and that you need to prioritise this. Ask if they will give you some breathing space to catch up with the house and then, once you have paid off any arrears, then you can look to start or increase payments to other creditors. As you pay off each debt in turn, you can filter down more money to the next most pressing name on the list.
If there is no money left over, or if there is a shortfall every single month, then we need to make sure the budget is in as good a condition as possible.
Trace the Waste.
We’ve talked about a written budget and I really cannot bang on about it enough. Grab bank statements, comb through and list everything you spend money on during the month. Do this for at least the last three months (six is better) to make sure you don’t miss things which don’t come up every month but which do come around repeatedly. Once you have your outgoings, you’ll be able to see very quickly what is left out of the money you have coming in. You will also start to see where your spending your money and, most likely, you’ll start to see things that can go. This isn’t always an easy process and you need to be as open minded as possible. There will be things that you initially feel are non negotiable, but you need to be willing to trim things as much as possible if you are going to free up as much cash as possible. This isn’t usually a problem in the FIRE community, and I know that anyone who is planning to FIRE will feel as though I am egg sucking territory but I frequently spend my days going through budgets with people who are convinced that their gym membership is an essential, or that they need the largest Virgin Media TV package. I have even had a woman tell me that it was unfair of me to suggest that she cancel the additional Maths and English tuition she was paying for her son to have every week. She was paying $60 a week for him to have 2 hours of tutoring outside of school time, but was $35 a month short on the rent and honestly believed that her home was unaffordable. Cut the lessons and she’s got a surplus, but she was horrified that I would suggest it. Even more horrified when I suggested there were free resources online that would help her son with his school work. This was a prime example of someone locking onto something and confusing the comfortable with the essential. If you have the spare cash, go ahead, feel free to spend it on whatever you want. If that means extra tuition to help your children at school, that’s a really admirable thing to want to provide them – in this case I don’t necessarily think this kind of spending is a waste, I just think it isn’t essential and can be replaced with low cost or free alternatives. If you don’t have the cash, the extra help with their grammar isn’t going to take the sting out of having to move out of their home. Things can always be restarted once the money frees up a bit and you may find that there is plenty you can do without once it’s gone.
Communication is the key with any kind of money trouble. If you have an open and honest dialogue with your creditors, your landlord, your bank, your utility companies, you stand a much better chance of being given extra time to get on top of things, a potential freeze on interest or additional charges being added and, sometimes, even a payment ‘holiday’ to give you time to catch your breath.
It also helps you feel more able to negotiate. It can be easy to just agree to things on the phone, especially if you don’t want to have to call back and talk to them again! But if you get used to calling businesses, being honest about your finances, asking for help when you need it and being polite when you need to say that you cant afford something they are asking for, then it will be much easier to successfully negotiate an arrangement that both sides can agree on.
Speaking up is also important if, despite your best efforts and all the budget wizardry you can muster, the numbers still don’t add up and you are genuinely stuck in a property you simply cannot afford. If this is the case, please contact your local council and speak to their Housing Options department. Go to them with a realistic head on. Please do not go in thinking that having a budget which shows your property is unaffordable will mean that they instantly hand over keys to a cheap as chips social tenancy as you are setting yourself up for a fall. What they will be able to offer is free advice. They will be able to refer you to any additional support that may be available, such as help to clear rent arrears, help with finding a cheaper private rented property, help with up front costs like rent in advance or a deposit and even help negotiating with your landlord if you have had any trouble.
The point is, you are far from the first person to go through this kind of bumpy patch and you are far from the last. Please, please, do not let it weigh you down, do not let it keep you from sleeping, eating or spending time with your loved ones. If you are feeling overwhelmed and honestly cant talk to your family and friends, then speak to your GP who, again, will not judge you or think any less of you, they will offer advice and support. I would think twice about keeping things from your loved ones, though. You may not want to worry them, or you may think that they will think differently about you, but you’re wrong. They will want to help and they will see you talking about it as a sign that you are in control and taking positive steps to deal with a problem. Don’t go through it alone, Speak Up!
That is my slightly rambling advice on how to tackle your finances when things are getting away from you. There is more detailed stuff to cover, but most of that is a bit more specific to particular situations – these are kind of a one size fits all set of tips which covers the stuff that I deal with most often.
Do you have any golden rules to help when things get a bit hairy, financially? Or are you in a mess and don’t know where to begin? I’d love to hear what experiences people have had with this sort of thing – you might be able to get some advice, or help someone going through the same thing.