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Charles Prashaw, 9 Jul
WHENEVER I meet people and they want to discuss their monthly cash
flow, they invariably say that they want to get a handle on their
monthly outgoings and for very good reason i.e. the cost of living has
skyrocketed over the past year as have mortgage rates so it’s
understandable that people are anxious. And with these various costs
changing every other month, it’s difficult to get a handle of what next
month’s costs are going to be.
And regardless of what your own particular circumstances are like, I
think most people are looking for ideas to counteract their increased
costs, so I’m going to put forward a suggestion to you in this article
that I’m hoping you might find useful.
But before I do, for it to work or any other idea for that matter, you
must know what you’re up against.
Because the first step in trying to reduce your outgoings is figuring
out how much you spend, and on what and sometimes this is an area
people struggle with. They tend to underestimate how much they actually
spend in particular areas.
Their perceptions and realities have different numbers going on. And
this probably applies more to those who don’t follow or have created a
monthly budget than those who do. People who are on a fixed income and
have a budget in place, can account for every cent they spend.
When you know what you are spending your money on each month, you can
make the necessary changes, because you can’t change what you can’t
measure, right?
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Limerick Leader Weekly GAA Notes
You need to know and account for where your money is going and I mean
where it’s really going. Don’t just say, it’s on mortgage/rent
repayments and fuel and electricity and food, although a large
percentage of your income probably is. But you still need to put a
number alongside every other area of expenditure.
You might be surprised what you’ll find, or perhaps you won’t, but just
find out anyway.
And you need to figure out what your number is, and once you do, you’re
in a position to take action.
And when I say number, I mean the difference from what you earn, and
what you spend.
Your spending will fall into two different categories i.e. your fixed
outgoings and your variable ones. Your fixed outgoings should be easy
enough, they are what they are and should be relatively consistent each
month.
It’s the variable expenses that you need to watch out for, because
they’re the ones that normally people run into trouble with.
And to begin with you may not know if the amounts you’re writing down
are absolutely correct or not, but it doesn’t matter for the moment,
just get them down and they can be amended later. It’s the act of
beginning this process which is very important. But, if you’re very
unsure about the amounts, checking your bank statements is a good place
to start.
After you have done all of this, I then want you to put one of the
following letters i.e. PERK, opposite each spending category, and PERK
stands for :
P = Postpone
E= Eliminate
R = Reduce
K = Keep
This idea was developed by the author and financial adviser, Robert
Pagliarini.
He’s convinced that people can dramatically reduce their monthly
outgoings by spending time analysing and categorising where they spend
their money. And the idea is a simple one but it’s very effective and
something I’ve used myself, as well as a lot of my clients, all who’ve
said it absolutely helped save them money.
So, let’s get into how you use the PERK method.
We know P stands for postponing which means putting off incurring an
expense like changing your car, buying a new computer, carrying out
home improvements etc.
By postponing certain expenditure, you’re creating or preserving money
that may have been used towards servicing debt repayments.
For example, a client of mine was thinking of changing his car earlier
this year because his existing loan was coming to an end. But why take
on another debt when the car he had was running perfectly fine.
So the €395 he was repaying is now going towards cushioning the impact
that his higher mortgage repayments was having on his monthly cash
flow.
It’s taking a little pressure off him, and he will change his car maybe
next year, so he’s not never going to change it, he’s just postponing
it until things get a little easier for him.
And he thought it was such an obvious thing to do, but he never thought
about it until he carried out this PERK exercise.
Okay, next up is E and that stands for eliminate.
And what you want to do here is look at all those monthly expenses you
can get rid of and if you did, you wouldn’t miss them.
So, it’s looking at those small and sometimes big monthly costs you
incur which when added together actually add up to be quite a bit.
When I first read about what Pagliarini was proposing with his PERK
system, I thought he made a very good point by saying you need to spend
time on this area because there might be expenses that made sense at
one stage in your life, but they don’t anymore and perhaps haven’t for
a while so it’s time to let go of them.
Next up is R for reduce.
And this is an area where you can make real savings.
For example, can you reduce the amount you spend on takeaways, or on
your weekly grocery shopping , or what about if you brought your lunch
to work one day per week?
Or can you reduce the amount you spend on home insurance or life
assurance premiums?
I remember reading a report from the National Consumer Association
where if I remember correctly, that they found that almost half of
consumers in Ireland never bother to compare prices to see if they can
get better deals with utility providers. And because we don’t we could
be leaving as much as €1,000 behind us each year.
And finally, K stands for keep.
These are those areas that are very important to you and when you write
the list and you go down through them and the ones not up for
discussion, you’re going to put a K opposite them because you’re doing
nothing with them. Maybe you can reduce their cost but it’s a cost that
will stay constant and you’re keeping it.
So, part of your monthly outgoings list will look something like this:
Change Car/PCP Finance P
Sports/Movie channels E
Life assurance/
Health insurance R
Gym membership K
Internet/Broadband R
Eating out R
Beauty treatments K
New clothes R
Home decoration P
Mortgage R
The above is just an example and what some people will put an E
opposite, others will put a K, and that’s fine, everyone is different.
But once you have that list and you know what’s staying and what’s
going and what you’re going to aim to reduce, you can then focus your
energies into each of them.
And doing this PERK exercise is all about becoming aware of where your
money is going and what you are spending it on each month, which, in my
opinion, is what people lack the most. And yes, it’s a pain sitting
down and going through what you spend your money on each month, but I’d
say give it a try, nonetheless.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can
be contacted at liam@harmonics.ie or www.harmonics.ie