All too often people only appreciate that their finances have got out of control when they start to incur bank fees and/or realise attempted payments have been rejected due to a lack of funds. In many cases the severity of the money crisis creeps up on people because they haven’t been monitoring their financial health. This may be because they have considered themselves too busy to devote time to financial analysis, or it may be a conscious or subconscious desire to bury their head in the sand. Whatever the reasons however, the consequences can be devastating if household finances are allowed to get out of control so it’s important to put in place mechanisms to flag any causes for concern.
Are you spending more each month than the income you are bringing in?
It’s worth doing a monthly check of your finances to identify how much you are spending in comparison to how much income is coming into your account. Now it’s possible that someone with a healthy financial outlook may occasionally have a month where their spending exceeds their income. An example might be where there are some one-off costs such as the cost of a holiday or the purchase of a new computer. However, the fact that you have incurred a monthly funds deficit can be a sign that your spending has gotten out of control and may need to be reigned in. This will be particularly the case if overspending persists over a period of two or more months.
Is your savings fund decreasing?
Whilst incurring unauthorised overdraft charges or credit card fees can signal financial difficulty, in some cases such fees will have been avoided by the person dipping into their savings funds to bolster their checking/current account. On the face of it, the individual may still look to be in a rosy financial position if they still have thousands in their savings accounts. However, if this short-term solution of raiding savings funds become a regular occurrence then it will become a problem. For example, that savings fund might be vital to allow you to make the down payment on a mortgage, or to help you prepare for retirement. Therefore, monitoring your savings balances, as well as your checking/current account, is an important part of ensuring that your finances aren’t on a slippery slope.
Is it becoming difficult to pay your mortgage?
Mortgage payments will typically be the biggest monthly outlay that a household will have and are also the payment that people will normally be most keen to ensure goes through. This is because failure to keep up on mortgage payments can lead to the bank repossessing the property. Therefore, if you are constantly facing a challenge to shuffle funds to ensure that your mortgage payment can be made, then this is a good indicator that all is not well and that your finances need to be overhauled.
Using bank statements to track spending:
The easiest way to keep track of how much you are spending, and what you are spending it on, is to review your bank statements. The fact that online banking provides access to historic bank statement details makes it pretty easy to go back and look at months’ worth of transactions. To get the full picture of your spending it’s useful to go through each item and assign it to spend categories. Examples of spend categories include Groceries, Mortgage/Rent, Entertainment, Gas/electricity, Petrol, etc. This may help identify whether you’ve seen a big increase in one type of spending.
This process of reviewing bank statements and analysing spending by spend category is the fundamental starting block of creating a budget. And it’s the process of budgeting that should then be at the heart of your action plan to improve your financial health. Budgeting will involve setting spending targets and then monitoring how you are doing against those targets. Your financial action plan may also need to include decisions on which parts of your finances need to be addressed with the most immediacy. For example, if you are incurring daily bank fees on an unauthorised overdraft then sorting out your checking/current account balance is likely to take priority over any other improvements that you may have targeted.