How to find out what's happened to your cash

Where is your money going? How can you set up a budget? Rob Griffin asks financial advisers and debt counsellors for tips
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The Independent Online

Keeping track of your money is crucial. Unless you know what you have coming in each month and how it's being spent you will be on the fast track to financial problems. Add in a few missed credit-card payments and you will soon have debt issues spiralling out of control.

Learning to budget properly is the answer. It might sound straightforward but understanding how best to allocate your resources, knowing when you have to make minimum repayments and monitoring your bank balance needs to be carried out with something akin to military precision.

The good news is that there's plenty of help at hand. We asked a panel of independent financial advisers and debt counsellors to supply us with their best budgeting tips, as well as taking a look at the new breed of personal finance programs on the market to help you monitor your money.

Step one: Deal with your debts

The first step is to get on top of your current financial situation. How much do you owe on credit cards? Do you have any other outstanding loans? Have you been suckered into opening up store cards charging punitive rates of interest?

It is crucial you don't bury your head in the sand and ignore debt problems because the earlier you seek advice, the more that specialist charities and agencies can do to help you, points out Una Farrell of the Consumer Credit Counselling Service.

"People need to work out exactly how much they owe and divide these into priority and non-priority debts – with priority being a debt for which non-payment could result in them having a utility cut off, losing their home or being sent to jail," she says.

A basic income and expenditure budget will show you how much money is available to service your debts. However, if you don't have enough to keep up with monthly payments – or are only making the minimum credit card repayments – seek advice from CCCS, Citizens Advice or National Debtline.

Step two: Put together a budget

So how do you put one of these together? Start by listing your take-home pay and any other income you receive, and then compare that to how much you typically spend each month. You might find it helpful to look through your bank and credit card statements to see where the money has gone.

You should list the essential expenditures you really can't avoid, such as your mortgage/rent, council tax, car and home insurance, utilities, fuel and food – followed by semi-essentials like clothes and retirement planning, that you could feasibly live without.

Finally you take into account the luxury items such as eating out and your satellite television subscription, says Justin Modray, founder of the website Candid Money, who points out that you should still shop around for the best deals even if you can afford everything on all three lists.

"If you're spending more than you'd like or can afford then some disciplined pruning will be required," he adds. "After trimming costs by shopping around, start by cutting back on luxuries and, if that's not enough, look to make cuts on your semi-essential items too. The main rule is to be realistic as there's no point drawing up a budget that looks great on paper if there's no chance of being able to stick to it."

There are always savings to be made that can help your budget, points out Mel Kenny of the financial adviser Radcliffe & Newlands. "In these times of low interest rates consider annual travel cards," he suggests. "Not only is there the saving for paying up front but you could also get a third off the price of train journeys to and from outside your area."

Step three: Organise your short-term savings

Once you have a list of target monthly expenditures you should add in a contingency fund for those unexpected items that invariably crop up from time to time. This can include emergency repairs to your boiler, paying for your car to be repaired or money to cover the cost of a filling at the dentist.

"If possible, try to also save at least 5 to 10 per cent of your income, including pension contributions," adds Modray. "If you have a specific purpose for your savings then run a simple projection to see whether you're saving enough."

According to Geoff Penrice, an independent financial adviser with Honister Partners, the best so-called rainy day emergency funds are those that are flexible, tax-efficient, convenient to use and which also come with an attractive rate of interest.

"It makes sense to use one's ISA allowance as the interest is paid tax free," he says. "You can save up to £5,340 in the current tax year and it is possible to get more than 3 per cent from the best ISA accounts, such as the Nationwide e-ISA."

Of course, this is still less than inflation which deems it unsuitable for the longer-term, but this is the price you pay for flexibility and convenience. "If you are willing to tie your funds up for longer then you can get around 4 per cent on a three-year bond and up to 5 per cent on a five-year bond such as BM savings Bonds from Birmingham & Midshires," he adds.

Step four: Put a longer-term savings plan in place

Patrick Connolly, head of communications at AWD Chase de Vere, believes the best approach for long-term savings is a combination of pensions and ISAs – particularly Stocks and Shares ISAs, which may be riskier but offer the potential for better returns.

"Pensions provide initial tax relief benefits but are inflexible, whereas ISAs can still be tax efficient and are extremely flexible," he says. "You should also check out any employers' scheme and find out whether they will make any contributions."

Step five: Choose the best way to track your money

You may have your finances sorted out but the challenge now is keeping on top of them. So what are the best ways to do this? Well, this will be down to personal preference. Some people like to use a basic pen and paper, while others prefer to let technology to do the hard work on their behalf.

Spreadsheet packages on the computer, such as Excel, have been around for many years and enable you to carry out complex calculations. This makes them ideal for tracking incomings and outgoings – just remember to print out copies and make back-ups in case you lose any data.

The next option to consider is specialist personal finance programs. There are now plenty of these packages available which allow you to see exactly what is happening to your cash and whether it's actually been working on your behalf.

A number of these are free to download, while others will set you back around £30. At their most basic they will enable you to construct monthly budgets and analyse expenditure. Others, meanwhile, allow you to import data direct from your bank and share accounts.

It's important to know exactly what you want from such a program but it's worth taking a look at Ace Money Lite if you want a free offering, or Bank Tree, Home Accountz or Moneydance if you're willing to spend a bit of money.

However, even the simplest programs require a considerable commitment in time, as you will need to manually input much of the data – although most allow information stored elsewhere to be uploaded – and then update it regularly to make it worthwhile.

The next step beyond these are account aggregators: websites that enable you to view all your online accounts, even if they are held at different banks, from one screen, instead of having to constantly log-on to various sites.

However, while these will save you time, you need to be careful as you are effectively allowing a third party into your personal banking arrangements. After all, you wouldn't hand such details over to someone you'd just met, would you?

Particular issues to consider include the fees involved, whether your bank allows you to give your passwords to an account aggregator, and what level of protection you will be afforded should something major happen, such as a security breach.

Regardless of what method you have chosen to keep on top of your finances, it's a good idea to monitor your spending closely for the first couple of months, then every once in a while thereafter to ensure you're sticking to the plan, advises Justin Modray.

"If you want to track things month by month, then personal finance software will come into its own, especially if it can import data from your bank account and credit cards," he says. "However, this takes more time than most of us want to spend, so a check every few months should be fine."

The important aspect of budgeting is simply developing an awareness of what you're spending and how your finances stand during the month. "If you need any motivation then just think how much happier you'll feel avoiding or paying off expensive debts," he adds.

Further information

Consumer Credit Counselling Service.Helpline is open 8am to 8pm, Monday to Friday and its online counselling tool CCCS Debt Remedy is available 24 hours a day, seven days a week at

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