Have you ever tried to run a race without knowing where the start and end lines are? Imagine the frustration of not knowing if you’re heading in the right direction, or if you’ve looped back on yourself and are essentially running backwards! Or imagine you’ve already finished and keep fighting on thinking you’re so nearly there… when you actually on the victory lap. You just never realised.
Your starting position is where you are right now. Your finish line is… well that’s a future discussion. But it is important to make sure you’re actually progressing and not standing still, or worse, being dragged backwards by decisions and actions of old. So for today, fire up your bank account’s transaction history, because we are diving into where you are.
What’s coming in?
According to HMRC, the vast majority of taxpayers in the UK are paid via PAYE (Pay As You Earn), where your employer pays you a salary/hourly rate for your work and they handle the taxes due to the government. You receive your payslips with the taxes already deducted and will usually not need to pay extra taxes to HMRC. If you know your pre-tax salary, you can also double check these numbers with a handy income tax checker, such as the very useful one at MoneySavingExpert.
The above graph shows that for 2013/14 in the UK, the median salary was £23,556 before taxes which works out today to a post-tax income of roughly £19,556 a year or £1,630/month. Do you earn more than this? Congratulations, you’re in the top half of incomes in the UK! Note that the mode (most common amount), is roughly around £16,000 pre-tax which would equate to roughly £14,418 a year or £1,201/month after taxes.
Once you know what you’re bringing in, it’s important to look at where this money is going.
Finding the leaks
What follows may be a somewhat eye-opening experience; I know it was the first time I sat down and worked out exactly how I was spending my money. If you have a ‘main’ bank account and/or credit card that you do your spending on, download your transactions list. It’s time to do some investigative work! I have my outgoings in a nice spreadsheet I update whenever a change occurs such as switching to a new provider, or I sign up to a new service – I would highly recommend creating your own to give yourself a clearer image of what your outgoings look like at both a monthly and annual level.
Monthly costs will most likely include the following, but if you have more, add them to your list. And be honest with yourself – if it’s something you enjoy monthly, put it in the list with either a solid number or a rough guess. If you have Direct Debits, then it should be easy to find some of these. To start with, stick with outgoings that you are basically required to have in a modern life (we’ll move on to the luxury items later). Your list will probably differ a bit from mine, don’t worry about it.
Examples of required monthly items may be:
- Rent / Mortgage payment (just your portion if this is shared)
- Food (not takeaways and restaurants)
- Electricity & Gas
- Council Tax
- Landline & Internet
- Mobile Phone Contracts
- Petrol / Diesel
- Subscription Services (Netflix, Amazon Prime, Spotify, etc.)
Do not, of course, forget about your debt payments, such as:
- Loan Repayments (Car, TVs, Sofas, etc.)
- Credit Card Repayments
- Student Loans (if applicable)
- Other Debt
Then move onto the annual payments you might be required to spend your hard earned cash on. Some ideas to get you started:
- Insurance (Car, Home, Pet, etc.)
- Car Tax, M.O.T., Breakdown Cover (if applicable)
- Annual Travel Tickets / Cards
- Ground Rent / Maintenance Fees
- Pet related costs (Checkups, medicines, etc.)
- BBC TV License
Putting it all together
After you’ve added up all your monthly costs and multiplied by 12, add on your other annual costs you’ve calculated above. Is this number greater than or smaller than your post-tax income that you calculated previously?
If your outgoing amount is lower than your income, congratulations, you are not spending more than you earn on meeting your basic needs. If it’s higher… then you are on course to serious problems in the not too distant future. Red alert! Turnaround! Iceberg ahead!
And even if you are on the right side, bare in mind that this is to meet your basic needs. I haven’t asked you to include holidays, nights out, takeaways, a new car, Christmas and birthday gifts or that new wardrobe you need to buy every year to keep up with the trends. If you add these in, this may swing you back into the ‘spending more than my salary’ side. You can live above your means for a while, but eventually it will come back to bite you.
And finally, your savings rate
I like to do a pretty simple version of this – take whatever you have left over from your salary and subtract your outgoings you calculated above. We will exclude the ‘luxuries’ for now, just to give yourself a starting point in an ‘imperfect world where you have no fun’. Then divide by your salary and multiply by 100.
For example: someone earning the median post-tax UK wage of £19,556 who has outgoings of £15,000 a year (or £1,250 a month) would look like the below:
Hold on to this number, because the entire goal of this blog is to get this number as high as possible to lead to even greater things. See you in the next post!