Press play to listen to the course introduction: 

Welcome to the Finance 101 course, designed for everyone wanting to get off to a good start in life and over a few weeks, we’ll work through the seven baby steps (Source: Dave Ramsey).

Two years ago, I moved into my new home in July, and when the weather got colder in October, my hot water boiler failed, and instead of reaching for my credit card, I had my emergency fund available to pay £1200 and have it replaced with a brand new one with a 10-year guarantee.

Life teaches us that unexpected things happen and having this small safety net, will help you start to break out of the debt cycle.

Do you know the difference between a Need and a Want?

A need is something that’s essential such as having a place to call home with running hot water and enough food to eat.
A want is something that’s not essential right now such as getting the latest smartphone when last years model does everything that you need.

Have you ever thought why so many people are in debt and why are we so tempted to buy something we don’t really need? Because we have forgotten in our modern times, the concept of delayed gratification with our always-on lifestyle bombarding us 24x7x365 with marketing messages to buy things that we perhaps do not need with money that we do not have.

One step to being prepared to deal with any unforeseen “need” is to save up your £1000 emergency fund and avoid going even further into debt.

How can I build an emergency fund quickly?

The quickest way is to see if you have things that you no longer need and try to sell them on eBay or Shpock. For example, I had an Apple iWatch which I bought in a moment of weakness and used for a few months, but it was quite annoying because it would beep all the time and distract me from work. So I listed it on eBay before Christmas and got most of my money back. Meanwhile, my analogue watch does a great job of telling the time and date 🙂

TIP: So as you are not tempted to dip into your £1000 emergency fund for non-emergencies, I’d recommend a fixed rate savings account, which your bank(s) will offer you and for which you will typically receive a higher rate of interest. You can easily set up a monthly standing order to build up your emergency fund until you reach £1000.

This plan won’t work if you spend more than you earn each month, so first, we must learn how to budget correctly.

To do this, add up all your monthly direct debits and standing orders as in the example budget below excluding debts which we’ll cover in baby step 2;

  • Rent/Mortgage = £800 (Assuming you’re flat sharing)
  • Council Tax = £150
  • Utilities (Gas, Water, Electricity) = £75 (Your share)
  • Mobile Phone = £10 (Assumes your smartphone is paid off and sim only deal)
  • TV license = £7 (Assuming you’re flat sharing)
  • Broadband = £20 (Possible to share BB with others in the house)
  • Travel expenses = £100 (Assuming you take the train/bus)
  • Car Payments = £0 (Assuming you do not have a car)
  • Food = £200 (Try to cook at home, because it’s a lot cheaper and healthier than take away)
  • Entertainment = £50 (This is last because the focus is on getting out of debt and not spending more than you earn). =======================================================
  • Total Monthly Expenses = £1396 (800+150+75+10+7+20+100+200+50)
  • Total Monthly Salary income = £2000
  • Total Monthly Left for debt payments = £604 (Credit card, Overdraft, Bank Loan and Student Loans)

As you can see from the example, you would have about £600 available for your credit cards, overdraft and student loan payments.

TIP: Your monthly food budget can be significantly stretched by simply changing supermarkets. Previously I would spend £70-80 per week at Sainsbury’s and about a year ago, switched to Aldi where I now spend £40 per week and have not missed the more expensive branded products.

TIP: You can further stretch your entertainment budget further by making use of online sites such as Groupon and Quidco amongst many others. Also, ask if your employer offers discounts on their benefits package such as discounted cinema tickets and online vouchers that can be used at many high street stores as well as online.

How to reduce monthly budget stress

  • Setup two current accounts with your bank.
  • The quickest method is to call your banks customer service number and open a second account for your household bills. It’s best if you do not have an overdraft on this latter account as our goal is to have enough funds to pay the monthly budgeted expenses and nothing more.
  • Use the first account to receive your salary and your regular spendings such as food and entertainment.
  • Use the second account only for paying your monthly direct debits and standing orders.
  • TIP: If your bank provides you with a debit card for this second account, make sure that you do not keep it in your wallet/purse because this account is not to be used for spending.
  • Your employer will usually pay you towards the end of each month, such as on the 27th.
  • On the 28th, set up a standing order to transfer our example monthly budget amount of £1400 + £50 contingency.
  • Contact the companies online or by phone and ask them to change the payment date to the 1st of each month because this way, by the end of the first week, all your bills will be paid, and you will no longer have to worry about them for the rest of the month 🙂
  • TIP: Most of us, tend to stick with the same bank for many years and for some reason have a feeling of loyalty to them. So, it’s definitely worth looking around, and an excellent and up to date source of the best bank accounts can be found here on Money Saving Expert with some banks offering cashback incentives of £100 or more for joining.
  • TIP: If you are transferring to another UK bank, they must move all of your direct debits and standing orders over within seven working days and once you’re happy with your new bank, make sure to inform your employer so that your salary is paid into the right account.
  • Some banks also have a minimum monthly payment amount which they expect you to pay in per month and if they’re your primary bank, you can set up a standing order to transfer in the required amount.

Summary: Why is this step necessary?

Emergencies always happen when you least expect them, and if you have an emergency fund, you can pay cash and will not be dependent on your credit card or overdraft to provide the necessary funds.

Okay, let’s continue with improving your financial education and please leave feedback in the comments section below.