Don’t trust your finances to fate

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Cash Questions Annie Shaw

Today we’re honoured to welcome Annie Shaw to MoneyAware. She’s a financial agony aunt extraordinaire; She’s a Daily Express columnist, Radio London money expert, BBC Three Counties Feisty Friday Money Minx and financial commentator, notably on her website Cash Questions.

Is “overspending” the main cause of debt? Or is debt caused by unforeseen circumstances and plain “bad luck”? It depends on the way you look at things.

StepChange Debt Charity did an interesting study in association with the eZonomics website. The site conducted a poll asking respondents to identify what they believed to be at the root of consumer debt. By far the largest number (49 per cent) named “overspending” as the main cause – or so they thought.

By “overspending” we tend to mean being flash with the credit cards, buying unnecessary items and living beyond our means.

Redundancy as a cause of debt was thought by the eZonomics respondents to be a much less significant element, at 29%. Other factors, such as family illness and bereavement, were believed to be relatively unimportant.

It seems that popular opinion couldn’t be more wrong, as hard data reveals that in reality 48% of people cite a wage cut or redundancy as the principal cause of their debt worries.

Wants and needs

Yet, when you come to think about it, don’t both sets of data actually show the same thing? Isn’t overspending simply allocating money to things you simply “want” and could probably or possibly do without instead of things you really need?

The tricky bit is defining what you “need”. Obviously we all need food, warmth and shelter. But, what about a savings fund or protection insurance?

Debt is the result of spending more than you have coming in. No one plans to get into debt, but for some people it happens when manageable borrowing becomes unmanageable because of an external influence – such as job loss, divorce or bereavement.

Anyone who spends every penny of their income leaves themselves at risk of falling into debt if their circumstances change. But there is a way round this, and yes, it’s known as “money saving”.

Many people, both rich and poor, are strangers to saving. They spend what they have in their pocket, piggy bank or bank account and then some. In an emergency they turn to credit to get them through the bad times. But that is a dangerous path to take, as many have found in recent years.

While obviously some people on low incomes need to spend every penny on life’s essentials, such as food, rent and utilities, many people don’t. They buy that ritzy pair of shoes, book the more expensive holiday, or buy that extra present for the kids at Christmas.

Emergency funds

But putting a little bit aside when the sun is shining makes all the difference on a rainy day.

As well as saving, you can also protect yourself against some of life’s harder knocks with insurance – against a death in the family, job loss or ill health. A few pounds spent on buying protection cover when times are good could save you a lot of financial stress if the worst comes to the worst.

One way of trying to save is to work out how much you need for everyday items and then save the rest. Sensible as this seems, it doesn’t really work.

If you are serious about saving, make the cash for your savings fund the first thing you set aside.  That way you’ll find it’s the little extras that you can’t afford at the end of the week, rather than the saving. It’s amazing how many of life’s apparent “essentials”, such as a meal out or a new jacket, are things you’ll never miss.

If you are already in debt, this method of putting money aside is a good way to pay your debts down, too. Put money towards your debts before you go shopping.

Of course, if you already have serious debt problems you should seek help, such as that provided by StepChange Debt Charity.

But if your finances are OK now, but you fear they might not be at some time in the future – and no one’s life is totally risk free – then putting aside some savings and making sure you have the right protection insurance could ensure you never need that help.

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