2. Best practice money management skills

Effectively managing your money will have an impact on all areas of your life – knowing how much you have coming in, staying on top of your bills, and saving for a rainy day reduces stress and helps you plan for the future. UK households spend an average of £3,329 per year on their council tax, energy, electricity, water and broadband bills, research from Santander says.

But the average person could also probably save hundreds of pounds easily – for example, by comparing utility providers or shopping around for groceries. Learning how to budget will encourage you to save money in every area of your life.

a. An introduction to managing your money

The average person has a lot of expenses to manage, including:

  • Household bills
  • Financial products such as insurance
  • Social costs, including presents for family and friends
  • Travel
  • Leisure activities

Keeping on top of everything you need to pay for can be daunting, especially when you look at it all at once. But just going from month to month letting your direct debits come out without keeping a close eye on what’s costing you the most is a bad way of managing your money.

To budget well, you’ve got to look at all your incomings and outgoings at once. The first step is understanding what money you have available, and where you could make cutbacks. It’s time to face up to how much you’re spending without a thought for your overall budget or key aims.

Top money-saving tips

Out and about

  • Shop around. Check out the competition before making a purchase – you could find it cheaper elsewhere.
  • Don’t impulse buy. The more expensive something is, the longer you should think about it. Don’t rush important decisions.
  • Beware of offers. Special deals are meant to get you to spend more – think about whether you actually need the item, or you’re being attracted by an offer.

In the home

  • Water bill. You can’t change your water supplier, but you can have a free meter installed, switch to showers and use a more efficient shower head.
  • Gas and electricity. Investigate different tariffs, switch to direct debits or turn your thermostat down (1°C - this could cut 10% off your heating bill).
  • Phone and broadband. Make sure your contract matches your lifestyle, rather than going for the cheapest deal and then being charged extra. You can easily compare different providers by using a price comparison site.

b. Advice on how to set a budget

Budgeting isn’t going to solve all your problems if you rush it and cut corners. Although you can use rough figures to get a general idea of what you spend, and what you can afford to spend, the more precise you are, the better. Great online budgeting tools come from Citizens Advice and The Money Saving Expert.

They’ll take you around an hour to fill out and you’ll need to find recent copies of the following to get an accurate assessment of what you have coming in and out:

  • Bank statements
  • Payslips
  • Debit and credit card statements or bills
  • Receipts for things you usually pay for in cash

Be wary of only concentrating on a typical month, as it can underestimate what you actually spend. You’ve got to also factor in costs like Christmas or holidays, as well as needs that might materialise every five years or so – a new sofa or car, for example.

To do so, The Money Saving Expert has a great suggestion, referred to as piggybanking. In the knowledge that your bank account lies (as it only shows you a simple snapshot of the scene that day), it helps you automate your spending. The idea is to help you constantly know how much money you can truly spend on each area of your life – including big purchases like a new car.

You do this by separating expenses out into different categories and having a different account (or “piggybank”) for each. This includes a main bank account, a bills account and around three or four of your other main spending categories – examples include holidays, Christmas, emergency funds and big purchases.

For those you access regularly and need to set up direct debits from, use current accounts. If you don’t need to get the cash out quickly, consider using savings accounts.

The next step is to “feed the piggies.” Set up standing orders from your main current account to shift the right amount of cash into the others each month. As an example, if you’ve decided to spend £800 a year to spend on Christmas, you’d put £67 a month into a Christmas account. That way it builds up over the year and you know exactly how much you can spend when the time comes.

c. Saving accounts and ISAs

We’ve briefly mentioned savings accounts – but what are they for? They’re bank accounts dedicated to saving. As such, they’ll have features which help you put more money aside including fixed and variable interest rates. That means you earn interest on the money you’ve deposited.

Different savings accounts let you do different things – for example, there are dedicated accounts for children’s or business savings, and you can choose if you want instant access, fixed term or limited access.

An Individual Savings Account (ISA) has similar features, with one notable difference – the interest you earn is tax-free – so you get to keep it all. Each tax year, you get an ISA allowance. For the 2016/17 tax year, this allowance is £15,240. Although you can save up this allowance, you can only choose one provider to have your cash ISAs with.

Different banks will offer you a range of products, but it’s worth deciding what’s important to you. Are you a regular saver or do you have a lump sum to save away? Would you rather have instant access to the money or are you happy to lock it away for a longer time? Get advice on what account would suit your requirements.

Generally, the longer you’re happy to put money away for, the higher interest rates you’ll get. If you decide to withdraw money from a long-term savings account at short notice, you may incur a charge – so it’s important the account is as flexible as you are. Since April 2016, more and more savings accounts offer tax-free interest, so there’s a lot of choice available.

d. Top tips for deciding what to spend your money on

Your finances should lead your lifestyle – not the other way around. Letting your lifestyle dictate your finances is a sure way of overspending and ending up in a spiral of debt. But, when you have money available, how do you decide what to spend it on? Well, once you’ve got your savings accounts and budget covered, the next thing to ask yourself is – do you need it?

Establish your priorities by referencing how much money you’ve got and whether you could satisfy the need with something cheaper. Good questions to ask yourself include:

  • Do I already own something that fulfils the same need? Does it need replacing?
  • Would it more practical to borrow this item from someone else for the short term?
  • Have I looked for a lower-cost alternative?
  • Are there any discounts available? Or am I just buying it because it’s in the sale?
  • Can I delay the need to purchase?
  • Can I afford it?