How To Afford Everything!

If you'd like to be the sort of person that seems to be able to afford everything, you can. You just need to know a little secret. Want to find out what it is?

My colleague, TMF Vertigo, pointed me to a brilliant post on our Living Below Your Means (LBYM) discussion board the other day. Essentially, it's an extract of a recent conversation that one of our readers, pancake101, had with one of her pals. Here's a quick, slightly abridged version:

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Pancake101: Ok, I'm just popping to the bank to transfer money over into my savings then we'll go for the coffee.

Pal: Savings? But you're going on holiday this week.

Pancake101: Yep .... Can't wait

Pal: Savings .......Ah (knowing look on her face). You must have won the lottery and haven't told me.

Pancake101: If I had won you know I would have told you.

Pal: Savings? (I can see she is puzzled). You must be in the money ...what was it?

Pancake101: Ok, I'll explain. I budget, and save each month for my holiday. However just because I am off on holiday does not mean that bills won't need to be paid for. I save for them through my savings account.

Pal: <silence> (she is gob smacked at the thought I had saved enough for my holiday and still put by my monthly amount for my bills).

Pancake101: Right, is it my turn or yours for the coffee?

I think I have shocked her into silence, perhaps she will ask how this budgeting lark works.

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Pancake101 has thus brilliantly understood, demonstrated and explained a vital skill that we at The Fool harp on about all the time -- harnessing the beauty of budgeting!

In essence the concept couldn't be simpler. We all get a monthly, household income, be it from salary, pension, interest, benefits or allowances. Additionally, we should all know how much we need to spend each month, be it on bills, rent/mortgage or other expenses. Subtract one from the other and you'll (hopefully) be left with a sum to save, or do with as you wish.

Now, on top of all that (and this is the bit you need to get to grips with) we all need to pay for other, typically quite big expenses over the year that don't occur every month. These include holidays, annual insurance premiums, car servicing, MOTs and other costs. Now, this is where a normal budget can fall down, as these costs haven't been planned in. Get a few bills like these in a month and you can suddenly find yourself wiped out financially -- or even in debt.

But this is where a proper budget can help out. Let's say Sarah pays around £200 for her car insurance each year, about £350 to service and MOT her vehicle and spends about £800 on holidays annually. That's £1350 she'll need to fork out -- and to make things worse all of these bills appear in July (as does her credit card statement for her holiday payment). Eek -- Sarah could easily end up in the red and charged interest.

But the thing is Sarah knows these costs come around each year and she plans for them accordingly. How? She simply squirrels away a twelfth of their costs (£112.50) each month into a savings account. After a year she has the money ready and waiting to be used, without having to resort to going into overdraft or using her credit card to pay her bills. Interesting, eh?

What's more, by factoring in all of her costs she knows exactly how much money she has available each month to save or spend. And, by cannily stashing that cash in a high interest savings account such as the ICICI Hisave account (paying 6.3% from later this month) she's earning good interest on her money, too! (Alternatively, Ing Direct and Sainsbury's Bank both offer the option to open multiple accounts and label them separately as "Car","Holiday" etc).

So as you can see, with a little planning you too could avoid worrying every time a bill falls onto the doormat as you'll know that money is ready and waiting to be used. And then you can take this a step further and save for things longer term. I know it sounds simplistic but believe me, it can really work -- and I should know as I do indeed practise what I preach!

Let's hope pancake101's friend has learnt a thing or two from her pal and has worked out her proper monthly budget -- and she just might find that she can afford everything she needs, too.

More: The Miracle Of Compounding | Earn Great Rates On Your Savings