At Developer Angst my goal is to address all of those awkward, annoying and stressful things we have to deal with in life as software developers and professionals. This time around I'd like to cover the financial aspect of our lives in a systematic way that's attuned with our developer hacking mentality.
Our finances, if left unchecked, can rip our professional lives apart and hold us back from achieving everything believe we can. It can infect your thoughts, occupy your mind and destroy your relationships. I've been battling with the best ways to handle finances for years; having had a child, arranged to get married (with a date set) and bought a house, probably 3 of the most expensive occasions in ones life, all in the space of a mere 3 years - they say a child alone can cost upwards of £200,000 until the age of 18!
In a previous blog post I talked about my future goals - one of mine is to get debt free by the end of 2017. This gives me 2 and a half years to sort my act out save up, pay for everything else and eliminate bone and soul destroying debt. Here I'm going to outline for you my thoughts about how you can achieve this, breakdown all of those misconceptions which people have and set you on the path to "FREEDOM".
Before we start though, you absolutely have to be committed to this. This will hurt.
But you want your freedom right? Who doesn't?! Well let's get started...
Don't Spend More Than You Earn
Well duh? Obvious right? Except so many people break this rule. Just look at the UK Government even. Current and former Chancellors of the Exchequer; politicians who are former accountants, even they struggle to balance the books at times.
However, we can control our spending and be masters of our own destiny. The key to not spending more than your monthly pay check is to budget, be aware of your budget and to never spend above that budget. This is a lot easier than done. The key is to assign every pound (or dollar if you're American) a job! However, before you do that you need to find out where you are right now.
Figure Out Where You Are Right Now
Before you can even start thinking about setting up a budget, you need to know where your money is going right now. Akin to looking at a computer bug. What the hell happened and why? Without this knowledge you'll have a dangerous possibility of falling into the same trap months down the line.
What is your “Gazingus Pin”? By “Gazingus Pin” I mean something that makes you say “shut up and take my money”. It might be the latest and greatest gadget, like the new mobile/tablet or a shiny new car. Mine is MacBook apps, online courses and a quick bargain. I'm an absolute sucker for it and sometimes if I spot an app I'm in absolute desperate need for or have been looking at for a while - I'll buy it - hands down, even if I don't absolutely need it right now!
Go through every bit of money that goes through your account, record every penny spent on a receipt and every direct debit or standing order that exits your bank account. Give each transaction a category, car, mortgage, travel, work lunch, utilities, birthday presents you get the point. Fill out as much detail as you can so you understand where your money is going.
Excellent now you know where last month's pay check went.
Calculate how much you earned from your salary. Record any other income you might get e.g. child support or supplementary income.
Now work out the difference. This is your net income last month.
Don't worry - it may be negative.
Now take a deep breathe - you'll feel liberated soon I promise.
Learn What You Want to Spend Your Money On
The point of the first exercise is to figure out where you're up to right now - so you can know just how bad things are. This what I like to call “acceptance”.
In my past article Your Money or Your Life I spoke about valuing how you spend your money and having an understanding relationship with it. I was strongly influenced by the book of the same title. Vicky and Joe who wrote the book helped me understand that essentially we separate our relationship from money to be a relationship of life energy. When you go to work or earn anything you trade your life and time to obtain some monetary compensation.
To work out how much this life energy is worth you need to work out how long you work, how long it takes you to get to work and how much time you spend getting ready for work. Basically anything you don't consider free-time. Work out over a year (taking into account annual leave and public holidays) how long in hours you actually work for your job. Take your salary and divide it by the number of hours you've dedicated and this is your hourly wage - in other words how much you are trading each hour of your life for.
This is important because it helps us figure out how much of our time we're trading for something we buy...
Referring back to your last budget, draw up a list of categories with how much you spent by each category. Work out how many of your hours you traded for each category. This is how much of your life you traded for it. Now give each category a life enjoyment factor between 0 and 10. Where 0 is absolutely no enjoyment whatsoever and 10 where it's absolutely worth spending in this category.
By knowing how much life energy your spending and how much enjoyment you get from each category you can figure out if you're spending too much of your money on it. This could mean you start looking for cheaper alternatives (if you still have to have it) or stopping spending money on it entirely.
There are unfortunately some things you do have to spend your money on like a mortgage, heating and utilities or food etc. but can at least think about still whether it's too much. Maybe you can downsize if you don't enjoy the house enough or search for a different energy supplier or maybe shop in a different supermarket.
This brings us on to one of those absolute musts. We all need to eat at some point and we all probably think our shopping bills are far too much these days - I know mine currently are. Sticking to a budget when shopping is an absolutely must.
Avoid the Offer
Supermarkets are shrewd marketers, they place items in the specifically targeted places to get you to buy them. They use headline grabbing figures such as “Buy One Get One Free” to get you to buy more than you probably need. Plan ahead and resist those temptations. Offers on general purpose household items like loo roll, toothpaste etc. are fine because you'll often use them so saving on your regular purchases makes sense with an offer.
One of the main ways to avoid getting caught in the marketers trap is to shop online and have pre-defined shopping lists that are strictly within your budget. Ideally shop at an online supermarket that allows you to have your own shopping lists.
First set aside how much you want to spend on shopping each week - on top of that you'll need a float for items you need just in case. I set aside an extra £10 per month for items that we may run out of because the lists don't quite cover it, this may unfortunately happen.
Now this is where the micro-management hacking developer mind comes in. You need to setup custom shopping lists at a fairly granular level. You'll need lists for items you buy monthly such as cleaning products, bin liners etc. Lists for items you buy weekly e.g. milk, bread, lunch for work and lists for set meals for a week.
Once you've broken it down into a granular level sort out set meal rotas that won't bust your monthly budget but will provide you with the nutritional balance you need to stay healthy. Your health is still important so make sure you don't totally undervalue the shopping category so that you can't afford fresh fruit and veg.
I feel that the extra £1-£3 I spend per week getting my shopping delivered is probably what I would have spent getting suckered into clever marketing placement anyway (you'd be driving to do it anyway!).
For me it's totally worth it for peace of mind.
The Subscription Drain
Remember that monthly gym subscription you bought ages ago and you haven't been for several months but keep promising you'll go next Thursday when you can drum up the energy. Either commit to going or dump it. Having it just for the purpose of massaging your conscience isn't helping. Pick a free alternative like running or just swimming instead. Personally I run and use the 7 minute workout app I talked about in my early morning routine.
You may have a bunch of other subscriptions you totally forgot about as well that are burning a giant hole in your pocket. If they don't rate high on your enjoyment level you defined earlier, cancel them
Cut Out the Luxuries
This is probably going to hurt a lot of you but that fancy car you have - if you have debts - you can't afford. The brand new iPhone you bought you can't have and that 50" inch curved Television screen has to go.
If you want to be debt-free and remain debt-free, everything you purchase from now on has to be bought with a surplus of cash or not bought at all. I currently have a 3 year old iPhone 4S (that's had it's battery replaced), 6 year old MacBook Pro (that I've replaced memory, upgraded hard drive, replaced battery, replaced touch keys and charging cable all to give it more life) that are still kicking around because I want to get out of the cycle. I have a 10-year old car as well (I would love a newer one but it's a drain and an expense I can ill afford). The same unfortunately goes for new cars and even nearly new cars - if you're borrowing on credit it's still debt.
Don't Pay into a Pension Until You're Debt-Free
When I've explained this to people in the past they haven't agreed with me or have been baffled by the notion of choosing not to pay into a pension at all. What I'm suggesting instead is that you make a concerted effort to pay off debt first then make up your pension later.
The thing is, paying into your pension early when you have debts is like putting money in a savings account that pays lower interest when you have a higher interest account sat right there. Pensions will never have a higher interest rate to beat credit cards or loans so why would you decide to put your money in a place that isn't even guaranteed (people lost part of their pensions in the final crash last decade). Instead you can absolutely guarantee paying down your credit card debt and it isn't unsecure unlike a pension. You're virtually guaranteeing you'll be better off so long as you save later and you don't go back into the debt route later.
Consolidate Your Debts
Paying off multiple debts can lead you down the path of paying of various streams of debt at the same time and risking a credit default or fine. This will naturally result in a higher cost than you might otherwise experience. Consolidating debt makes things easier to handle (by lumping them all in one place). Once you've consolidated debts you'll know exactly where you are and how much debt you have and how long it'll take.
Leverage 0% Interest Balance Transfer Credit Cards
Banks often offer 0% Balance Transfers which means you can swap debt from one credit card to another and only pay a small fee on the initial amount (normally something like 2.9%). I've found this is an absolutely ideal way to reduce the overall interest paid on credit cards in the long term and keep the overall cost of borrowing low. If your credit is good and you have a number of credit cards often your bank may remind you of balance transfer offers so you can keep moving debt around and never have to pay regular interest - awesome.
Still remember credit cards are bad - I'm slowly learning this...
Joint Bank Account
This is something both my partner and I have been reluctant to do for a while but I absolutely think this is a crucial piece of the puzzle. You and your partner absolutely need a joint bank account to cover household expenses such as shopping, fuel for the car and other joint expenses. You can top it up if you need to but the great thing is it means that the regular expenses can be managed from a single account and you'll know if you've bust your budget at the earliest opportunity.
I'm slowly trying to incorporate all of these tips into my own life - I'm hoping it will help me achieve the freedom I want for my family and I hope it allows you to achieve the financial freedom you need to make the choices that will enrich your life.
I highly recommend picking up a copy of Your Money or Your Life if you want to be able to cut out all the things that don't add enough value to your life and concentrate on the things that do.
Thanks for reading and I'd really love to hear from you on Twitter or in the comments below how you found my advice and whether you have your own tips that work for you.
Until next time.