Finances First - How to "sort out your finances": advice and detailed tips

I really do apologise for the delay between posts, but I've been pretty busy these last few weeks for some reason - I've hardly been near the computer. I intend not to let this slip in future, and blog more regularly - otherwise what's the point of anyone following my journey of changing career in tough economic times if I'm not keeping you all updated?

Now that I'm back, however, I need to follow on from the previous post. This will be quite long as it's packed full of advice and tips, so be prepared. It's easy for me to advise "sort your finances out first before you think of a career change" without actually explaining what the hell I'm talking about, or even explaining what I did.

By "sorting out finances" I mean putting into action some sort of plan for your finances that will help your career change than hinder it; your own personal financial plan that will free up time and energy for you to consider what you want to do.

This means considering the following areas:

• Debt
• Living within your means
• Saving
• Maximising your income

How to deal with each of these will be covered in the rest of the post below - click on the above links to view each section in more detail. Click here to read more...

Debt

You will need to put a plan in place for paying any debts off as quickly as possible (barring mortgage debt and perhaps any university student loan debt). The debts with the highest interest rates must be paid off first - credit card debt, for example. Ideally you will be able to pay off your credit cards debts in full by the payment date. If not, you could try transferring the balance of any credit card debts you have onto a limited-period 0% interest rate credit card (so that you don't incur additional interest which will cost you more money) and try to pay off the debt before the 0% interest rate offer runs out. Some people, at this stage, transfer the outstanding balance to another limited-period 0% interest rate credit card and continue to pay down the debt.

Alternatively, you could pay off all your credit card debts by taking out an unsecured personal loan with the lowest interest rate you can find, and pay this off. This is often a sensible idea, as with a credit card you are often paying interest at about 20-30% a year (which, on an outstanding balance of £10,000 - or $10,000 if you prefer, but I'll use British Pounds rather than Dollars as it's easier for me - equates to an extra £2000-£3000 a year that you owe the credit card company, or about an extra £167-£250 a month) and with a personal loan at say, an interest rate of 8% a year, you would be paying A LOT less (a loan of £10,000 which paid off the outstanding balance on your credit card of £10,000 will only be paying an extra £800 a year on top of the loan, which is an extra £66.67 a month).

If you're a homeowner, there is option of paying off your credit card debts by taking out a secured personal loan - which is a loan that gets added onto your outstanding mortgage. The advantage of this is that the interest rate on mortgages is far lower than that on credit cards. Personally I don't think it's a good idea to consolidate debts on your house if you're a homeowner, particularly in times of falling property prices. However, it is best to seek advice on whether this is the best option for you or not, as in some cases it may well be the best way for you to pay off debt. The Consumer Credit Counselling Service in the UK (see below for details of website) may be able to help.

Debt is the fastest eroder of wealth there is; it is also the fastest eroder of a person's peace of mind. While it is highly likely that it can be paid off overnight, it still must be paid off, and by putting a plan in place for doing so you would be well on the way to attaining that peace of mind. It's not pleasant, I know, but think of it as a sacrifice now that will bring you far greater rewards in the future.

In the same vein, try to think of your current job as providing the financial means for your future, even though you hate it. Again, it's a sacrifice now that will bring you far greater rewards in the future.

In the meantime, do not get into any more debt. Try to kick the habit of relying on debt to pay for your life. Not just because of the credit crunch and the likelihood of losing one's job, but also because the longer you are committed to paying back debt, the less time and money you will have for building up some degree of wealth which will buy your freedom, and enable you to make that career change.

If you're renting, do not buy a property. I know house prices are the lowest they've been in the last 3 years, but unless you have a 50% deposit or down payment on your desired property, you are probably going to pay more money for your mortgage every month than your rent. And having the monthly commitment of more debt (this time, your mortgage) is going to keep you in your hated profession longer than you would like rather than freeing you up to make a career change.

Trust me, I know all about this one. While the property I bought was reasonably priced (a rarity even back then in spring 2006) and the mortgage payments are still not too high, the fact remains that I was renting a room in a very nice house with very nice tenants for half my monthly mortgage payment. Which was stupid as I knew even back then that I hated accountancy and wanted to get out. The fact that I had a mortgage means that I have had to stick with that accountancy career right up until the present day - when I could really have left it a lot earlier: probably back in 2006 actually, when the deposit I had saved could have lasted me at least a year without work, if that's what I wanted. So don't make the same mistake I did!

If you're unemployed (and many of us are during this credit crunch), don't panic. You should be entitled to Unemployment Benefit in the UK, and although readers anywhere else will have do some research into similar government welfare programs in their countries for financial assistance while you look for another job. There are government debt agencies (like the Consumer Credit Counselling Service at http://www.cccs.co.uk/, which is a UK charity that gives free debt advice) if you are struggling with debt.

And remember: you SHOULD NOT HAVE TO PAY for any debt advice, so please steer clear of those sharks who prey on the debt-ridden to "help" them with their debts "for a small fee". Please don't give them either your time or your money - they are only there to rip people off.

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Living within your means

This basically means not spending more than what you earn. If your income per month (after tax) is £1,500, then your spending each month should not exceed £1,500. This might sound obvious, but the average household in the UK and the US is breaking this basic rule every month, sending people deeper and deeper into debt and ensuring they are back at square one, continually paying off debt. It's like being a hamster on a wheel - no matter how fast you run, you will never get anywhere unless you break the debt cycle.

Living within your means does not mean you have to spend exactly what you earn either. You need to be able to meet your essential financial obligations (mortgage/rent, utilities, property taxes, transport and food) and still have money left over to save.

You may need to rein in your spending and change your spending habits to do so. One way to do so is to spend only using cash. People using cash tend to spend less than people using credit cards. Alternatively pay for your spending on your debit cards and check your bank balance regularly (I check mine at least every other day). That way, you can see how fast your bank balance is decreasing and put more thought into what you buy. You may well find that you are spending a lot of money on nice things (we ladies are particularly prone to shoes and handbags!) that you don't really need and won't really use. Even if you see a gorgeous pair of shoes in a sale for only £10, if you're hardly going to wear them and you already have lots of shoes, it's still £10 wasted. It's still £10 that could have gone towards your eventual freedom from your crappy job!

Spending less and being frugal does not have to be a chore. You can still lead a great life and look good for less money. It's about getting more use and more joy out of the stuff you have, and about getting exactly the same experiences and products for less money. Which of course can't be a bad thing, can it?
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Here are some money-saving tips that can still ensure you enjoy life and spend less:

1. Never pay retail. Make use of discount coupons (you can find some online at the website http://www.myvouchercodes.co.uk/), "3 for the price of 2" offers, or Buy-One-Get-One-Free (BOGOF) offers, particularly on non-perishable items such as toothpaste, bathroom cleaners, books, drinking glasses, toilet rolls and so on. The "never pay retail" rule can also apply to buying food items like meat and veg on BOGOF offers or similar, although you have to make sure that either you eat them in time (because throwing away bad food would be a waste of your hard-earned cash) or that you put them in the freezer to keep longer.


2. Borrow and rent books and DVDs, rather than buying them. If I had to buy them, I bought them on Amazon or eBay. If your local library is utterly useless for books, like mine, borrow from friends or use a book-swapping website like http://www.swapcycle.co.uk/ (this, like Freecycle at http://www.freecycle.org/, can be used for swapping other items for free, too).
   Lovefilm (http://www.lovefilm.com/) does a DVD and computer games rental service - for a subscription of £10 a month you can order up to 4 DVDs or computer games to watch or play.


3. Change your utilities suppliers for better deals. http://www.uswitch.com/ is a popular choice for comparing and contrasting deals on water, gas and electricity.
   
4. Buy your clothes in the sales, or with discounts (either online or in-store). Or at low-price stores like Primark and Peacocks, especially for ultra-fashionable items that will go out of fashion next season and therefore be unwearable - you won't feel so bad if you've spent only £5 on a shirt or blouse which will look silly if worn in the next season or so. Charity shops also throw up the odd gem - I bought a gorgeous Oasis woollen-blend pencil skirt for £4 which originally retailed for £50, and hardly worn too! For those of you ladies who love designer clothes, check out http://www.dwslondon.co.uk/ for the Designer Warehouse Sales dates in the UK, or Billion Dollar Babes sale in the US - see http://www.billiondollarbabes.com/ (got this tip courtesy of Merryn Somerset Webb's excellent personal finance book for girls called "Love is Not Enough: A Smart Woman's Guide to Money").


5. Remortgaging onto a cheaper mortgage can often save you hundreds of pounds per month (and thousands of pounds per year), especially as our mortgages tend to be our largest monthly cost.


6. Take your own sandwiches to work. A typical Londoner easily spends £3 or £4 a day just buying lunch. That's roughly £55 to £80 a month, or £660 to £880 a year! If that money was in a bank account at, say, a 5% annual interest rate, it would easily earn you half a month's worth of free sandwiches at the end of the year.


7. Cut down on buying coffee or tea on the go, and make your own at home or work: it's worth noting that a small Starbucks latte is around £2, compared to making your own for pennies. One Starbucks latte a day for 5 days a week can add up to over £500 a year.


8. Cut down on your transport costs and walk. Working in London often means I get the train to one of the London stations, then pay a small fortune to use a dirty, smelly, stressful, overcrowded London Underground train to get to work. Taxis, while considerably more pleasant, are ridiculously expensive - if you can help it, don't. When I spent 30 minutes walking to work from London Bridge station, rather than using London Underground (which I hate anyway) for 10 minutes means that I don't have to pay for travel within central London (zone 1), which saw my monthly travel costs fall from £111 a month to £73 a month. North Londoners who have to use the tube may find that they don't save so much money this way, but using a bus instead of the tube, or walking for part of the journey (starting your walk from just outside London's zone 1) can still save a bit of money. Plus not only do you save money, you get fit too!


9. Eat out less, get takeaways less, learn to cook basic nutritious meals. This can save you a lot of money in the long run. If, like me, you love eating out every now and again, then check http://www.toptable.com/ for discounts on restaurants worldwide. You earn points for eating at and rating each restaurant you book through them, and if you earn enough points you get a free meal at a selection of top restaurants. Hooray!


10. Cancel any gym memberships you don't use - you really are paying £500-£600 for nothing. If you do go occasionally, it might actually work out cheaper to just pay as you go. If you need to exercise, running is free, save for the cost of a pair of trainers - if you hate exercise, then disregard the running advice...


11. Switch to own-brand supermarket products where possible - they're generally exactly the same products as the branded goods (sometimes even manufactured by the same companies) for less. Sometimes you may find there are some exceptions (supermarket own-brand baked beans never taste as good as Heinz, for example) but generally you won't notice the difference.


12. Buy food in bulk where you can at outlets like Costco.


13. Buy your fruit and vegetables at a local farmers' market instead of a supermarket - they're generally cheaper and last longer.


14. Get the cheapest insurance you can.


15. Get discounts where you can on booking holidays. Ask travel agents for any discounts, or better still, book on the web at budget airlines like easyJet, Ryanair or Air Asia. Other airlines will often run their own promotions too, often in conjunction with hotel deals.


16. Get the cheapest mobile phone (cellphone) contract you can. As a pay-as-you-go customer I was shocked to learn I was spending around £50 to £60 pounds a month (sometimes even £70 in a hectic month) on mobile phone cards, so I switched onto a contract deal where I pay only £35 for 600 minutes and 500 texts. I never actually use up my allowance, but it's saved me a heck of a lot of money.


17. If you're a woman, get your hair done every two months instead of every four to six weeks (I hated this one at first, but having my hair done only 6 times a year instead of 8-12 times a year has saved me at least £200 a year). Alternatively if you're willing to go to a trainee hairdresser, they will often do it for free (though you won't have a choice in the style). If you're a bloke, it's a lot easier to save money: there are lots of barbers who charge a mere £5 or £6 a haircut. I have a male friend who has taken saving to the extreme and cuts his own hair - he's surprisingly good too and hasn't paid for a haircut in years!


18. The smokers will hate me for this one, and I apologise profusely, but - ignoring the health implications and the wrath of the anti-smoking lobby - if you smoke a pack of 10 cigarettes a day, as the average price for a pack of 10 is about £3 that adds up to £1,095 a year. That's an average of £91.25 you'd be spending of your monthly pay-cheque, on your habit alone!

Tough economic times are horrible for all of us to live through, and cutting your spending becomes even more important. However the flip side of the credit crunch is that, with discount supermarkets like Aldi booming and increasing their advertising spend; with retailers frequently holding discounts and "sales" to boost their revenues; with airlines and hotels and restaurants holding - sometimes quite drastic - discounts and freebies for customers; with interest rates so low that many mortgage-holders are paying less every month; there's actually never been more opportunities to live within one's means!

There are some very good websites for helping you cut down your costs on all aspects of life, such as the following:

• in the UK: Money Saving Expert http://www.moneysavingexpert.co.uk/
• in the US: The Dollar Stretcher http://www.stretcher.com/

Merryn Somerset Webb in her book "Love Is Not Enough" mentions the US money-saving websites http://miserlymoms.com/, http://www.tightwad.com/ and http://www.cheapskatemonthly.com/ as ones that are also worth a look.

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With all that extra money you have every month, we can move onto the next section....

Saving

Once you've managed to change your mindset from spending everything you earn, it's time to adopt the discipline of saving. There are different ways of doing this. Some people recommend you get paid directly into your savings account, with most of being sent out by direct debit into a current (or checking) account, which you use. So, say, for example, your after-tax monthly salary or income is £2,000, this whole amount goes straight into your savings account, with an automatic direct debit set up to send, say, £1,800 to your current account for everyday spending, paying your bills, paying your debts, and so on. That way, you don't touch the money in your savings account, and when you get a bonus the bonus automatically goes into your savings account, meaning you're less likely to spend it. Another way (and probably the way most of us do it) is to have your salary go into your current account, for everyday spending and bill payments etc., and then transfer an amount to your savings account some time before the next payday.

Another way - a variation on the last way - is receive your salary into your current account, and automatically set up a direct debit for a certain amount to go straight into your savings account. So, for example, if your after-tax salary or income is £2,000, the moment it arrives in your current account £200 is automatically transferred by direct debit into your savings account, leaving you with the remaining £1,800 to spend. David Bach, in his book "The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich", recommends you do it this way: that you set up an automatic bank transfer to your savings account of 10% of your monthly income (or whenever you receive your income). He argues that you soon learn to do without this 10% of your income, and rather than having the mindset that you have £2,000 a month available to spend, you soon get used to only having £1,800 without even thinking about that extra £200.

It doesn't matter which way you do it, as long as the habit of saving is established. Saving between 10-20% of your income is the fastest way to build up your savings, but if you're already so committed to paying of debts, start with a much smaller amount. Bach himself described in "The Automatic Millionaire" how, in his debt-ridden 20s, he started off by saving only 1% of his income a month so that it did not hurt. The important thing is the habit, rather than the amount.

While interest rates are so low that savers are almost being punished with rubbish returns, it's still worth having cash set aside, especially in these times. Having started cutting my spending and saving in earnest around January 2008, I was fortunate enough to take advantage of high interest rates on savings accounts, opening a cash ISA (stands for Individual Savings Account, a type of UK savings account that doesn't deduct tax from the interest that you earn) which paid 6% gross of tax, and a regular saver (which does get tax deducted from the interest) that paid 10% interest provided I didn't withdraw any money within a year and made a payment of at least £25 a month - very punitive conditions, so only worth taking up when I was absolutely sure I wouldn't need to access the money within a year. But it's meant for the last year I've managed to earn a nice couple of hundred pounds in interest income, without me having to lift a finger.

Of course, savings rates have dived since then, but if you look hard enough, you will still find savings accounts that offer interest rates of 3% or 4% a year. Not great, but it's still a lot better than what most people do with their savings - leave them languishing in current accounts that pay a measly 0.01% a year! If that's you then please move them into a decent savings account NOW!!!!

It is never too late to start saving, even if you missed out on the high interest rates of the last couple of years. In the credit crunch, as I've said before, it's even more important to have a pool of savings to draw on in case you lose or job, or if you've lost your job. Remember - when the going gets tough, the tough have cash!

Some people advise paying all your debts down first before starting to save, but in my opinion it's a big psychological boost to start saving small amounts even while you're paying off debts. It is recommended each person has at least 3 to 6 month's worth of savings to draw on, but if you're thinking of changing career, you probably need 6 to 12 in my opinion! Of course, much depends on what you're comfortable with - some people feel they need around 2 years' worth of cash saved up in order to sleep comfortably at night - but as long as it's in a bank account paying a decent rate of interest, that's perfectly fine.

In these times of failing banks, it's best to spread your cash out between different banking institutions. The idea is that if one bank fails, then you won't be left high and dry - while in the UK the government compensate the first £50,000 of cash balances in each institution, you'll still need to wait quite a while in order for your cash to come through.

There's one more important thing to mention: pensions. If you have an employer-linked retirement savings plan (referred to the 401(k) in the US) it is worth contributing some money into that, or at very least accepting your employer's contributions into the plan. I am not going into this any further as pension rules take a lot of explaining, plus it's more saving for your retirement (which is still important, of course) rather than helping to sort out your career change.

If you feel that you'd like to save more money or pay off debts faster, there are other things you can do as below.

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Maximising your income

While we have discussed one way of maximising your income - by cutting your spending so that you do indeed have more money - there are other ways of increasing your income that you can deploy.

You might want to consider the following:

1. Rent-a-room scheme. In the UK, this is the one allowance the government gives you for tax-free rental income, and in my eyes it's an absolute godsend. If you have a spare room in your main property of residence (whether you live there as a homeowner or tenant), then you can let the room out to a tenant for tax-free income provided total receipts do not come to more than £4,250 within any tax year (the UK tax year runs from 6 April to the following 5 April). This is roughly £354.16 a month of extra income! Income, however, must ONLY be from rent rather than any other services (for example utility bill payments, laundry and meal services, council tax etc). If you are renting, you may have to check the terms of your contract with your landlord to see that you are allowed to sub-let a spare room to a lodger. Further details can be found at the following website http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_4017804


2. Selling items on eBay. Any old or unwanted items can easily be sold on eBay for some extra cash.


3. Asking your boss for a payrise. You will need to have a strong argument to support your case: your boss doesn't care that you think you deserve it, so point out all the good work you have done for the company and get recommendations from others within your team. Note, however, that this one might not work in the current economic climate! Even in better times, they may say no - this happened to me!


4. Remember, if something looks too good to be true, it probably is. Beware of scams that promise you can earn lots of money in a short space of time - chances are they will cost you a pretty penny and earn you nothing.


5. Starting your own (profitable) business. I am not really able to comment on this one, having never done it myself, but I will be looking into it seeing as I currently have the time to do so...


6. Taking on a second job, if you have the time and the energy to do so. You'll have to make sure that you're paying the right amount of the tax though - UK readers should see H M Revenue & Customs' website at http://www.hmrc.gov.uk/ for more details.


7. Investing/trading on the stock exchange. I'm quite reluctant to mention this one, as many people have tried with disastrous results, but unfortunately it is a valid way for some people. It's not a way to make money fast though, which you'll hear some people falsely bragging about. Again I can't comment on this one, having not done it, but I think you should only go into this one if you know what you're doing - having done plenty of research, are interested in business news, read some books on the matter and have plenty of cash to start with. NEVER USE MONEY YOU CAN'T AFFORD TO LOSE.
   For UK readers, Robbie Burns's book "The
   Naked Trader: How Anyone Can Make Money Trading Shares" is a good read on the subject, and there are
   plenty for US readers to choose from: Peter Lynch's book "One
   Up On Wall Street : How To Use What You Already Know To Make Money In The
   Market", for example. Warren Buffett, the world's richest investor,
   was tutored by Benjamin Graham, and hails Graham's book "The
   Intelligent Investor: The Definitive Book on Value Investing. A Book of
   Practical Counsel (Revised Edition)" as "by far the best book on investing ever written". It is probably best to read as widely as possible on the subject of investing before committing to it, but as I say, having never done it, I'm not in a position to recommend whether it's a good way to maximise your income or not.

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I apologise for making this so long, but I wanted to make it as comprehensive as possible... and include it all in one post so that I can actually get on with talking about career changing rather than personal finance.

Thanks very much for reading. If you have any comments or corrections, or want to discuss anything I've put in this blog, please leave a comment below.