Finances – Expenditure – part 1 of 2
Finances – Expenditure – part 1 of 2
I already covered income (or money coming in) in an earlier article. Now we’ll take a look at the other side of the coin, so to speak: expenditure or money going out. Christmas is typically a very expensive time of year with presents, festive food and various social events. It’s fine to indulge a little, but that often means we need to tighten our belts a little going into the New Year.
Overall, I’m fairly sensible with money – being true to my accountancy background – and stick pretty closely to my personal budget. But this doesn’t always mean it’s easy and I’m never tempted to overspend. I’m sure that some of you could do with some support in this area too.
This article aims to categorise different types of expenses we may have today, or aspire to have, so we can begin to manage our outgoings better, both now and for the longer-term.
Financial Hierarchy of needs
I’ve been familiar with Maslow’s Hierarchy of Needs from a motivation perspective for many years. I then came across the Financial Hierarchy of Needs a few months ago, which really resonated with me.
Since then, I’ve actually found different variations on the theme, but I like this one for its simplicity
The idea is that starting from the bottom, you need to address each level, before moving up i.e. you can’t even begin to think about accumulating assets, if you don’t have enough food to eat. I think this is a really useful way to consider our personal finances, especially with an eye on our later years.
I plan to look at each of the levels in turn from a general perspective, with some specific comments with ageing in mind. Just a cautionary note, it isn’t always clear cut and the way in which we perceive some expenses may differ. What one person perceives as a basic need, may be a luxury (enhancing life) for another, but I think the principles are useful.
There is a lot to cover here, so I’ll look at the first two levels in this week’s article and the remaining four in next week’s. I also feel as if I’m barely able to scratch the surface, so there’ll no doubt be future articles digging deeper into some of these expense types and how to save money or get good deals. I do love a bargain!
The most fundamental basics are shelter and food, but I think necessities extend further than this.
Most people need to pay some kind of rent or mortgage and other housing related costs such as utility bills. To a certain extent, many of us have some choice over our location and type of accommodation. We generally have less discretion, however, on expenditure on electricity, gas, phone etc., although it is possible to save money via usage and if you shop around. There are also services such as utility warehouse that help to consolidate your bills and ultimately save you money.
We also all need to spend a certain amount on food. There can obviously be huge variations on the absolute amounts spent, depending on our choices and habits, as well as the relative amounts compared to our income. Most supermarkets offer low-cost brands, and often unprocessed foods can be bought at lower cost anyway. Planning ahead can also greatly affect the amount we spend on food, as well as minimising waste. Shopping around (off your own back or via comparison websites) and making use of coupons and vouchers, can also impact the amounts spent on the same goods.
Basic clothing may also be seen as a necessity, although this one could have an even bigger range. School uniform and simple clothing for example may come under basics, but you generally have a choice in terms of what and where you buy them. This can range from designer labels to charity shops and numerous options in between, including high street and supermarket clothing. The choice has been greatly enhanced in recent years, with the internet being a great marketplace, for new and second-hand clothes.
Travel could also be seen as basic need. Whether you drive or predominantly use public transport, many people often need to travel to get to work or earn a living of some kind. While you have some options (and hence control) over the amounts spent on a car e.g. type and brand of car, frequency of replacement etc., there are less discretionary amounts e.g. insurance, servicing costs, fuel, road tax, etc. Personal preferences and shopping around are both in your control, although the latter needs to be weighed up against the investment of time required. Car sharing and lift sharing schemes could also be options to minimise expenditure in this area.
The cost of public transport is mainly non-negotiable although there are some opportunities for economies based on time of travel, time of booking, distance travelled, car park charges & fuel versus walking or cycling, some or part of the way etc. So, while some expenditure is required, there are definitely options here.
At different times or stages of our lives, there may be different components to these basic necessities.
As we get older, for example, we may need to pay for carers or nurses to come and attend to our needs. Although there may be grants available, these are often heavily means tested. As a result, these services are often sourced privately via specialist agencies. There may be more costs like these as time goes by, as the population ages and the social care available will be limited.
We are all unique and have different circumstances. Some people may have maintenance or alimony payments to make from a previous relationship, or non-negotiable debt payments to pay down. Controversially, cigarettes and alcohol may also be seen as necessities, if these are your poisons.
Safety & security
Once you have the basics covered, the next step would be to enhance your safety and security.
There are numerous types of insurance available – for cars, houses, travel, pets, payment protection, health, personal liability etc. I’m pretty sure that you can all name others that I haven’t listed here. Sales pitches are often so compelling that they could be mistaken for being compulsory, but most aren’t. Car insurance is the only compulsory one by law for individuals in the UK (car owners only!). But there are other good reasons for taking out insurance – it can protect you from future losses that you couldn’t afford if you had to foot the bill yourself. These could often be extensive, as it’s not just a question of your personal loss, sometimes the claim can relate to compensation to others for their property, as well as personal liability claims.
Firstly, you’ll need to weigh up if you want to take out a particular insurance coverage – premiums can be costly and you may never actually recover any benefit. Although not compulsory, many are advisable or strongly recommended. Some could also be mandated e.g. property insurance linked to mortgages etc.
There are various comparison sites to help you reach the right decision for the type of insurance and level of cover you might need or choose.
It’s probably worth checking these out each time you take out or renew insurance policies as there have been various stories about existing policy holders not always getting the best deals.
It’s also worth noting that insurance premiums are calculated using a number of criteria, often including the age of the policy holder, whether this is health, travel, age, life assurance etc.
As well as generally shopping around, it may be worth considering some of the age-specific insurance providers, who may offer more competitive premiums, as well as more comprehensive or appropriate levels of cover. Saga and Staysure both specialise in insurance for the over 50s.
Rainy day fund
Alas, life is full of uncertainties. Making sure you have a contingency fund in case of emergencies or unexpected expenses is advisable. Who can predict when the car will breakdown or the washing machine will need to be fixed or replaced? As the ‘job for life’ fades into distant memory, this is probably even more important, as you could unexpectedly find yourself without a job, with reasonably short-notice.
According to the Money Advice Service, a good rule of thumb is to have three months’ essential outgoings available in an instant access savings account. If you have this today, great. If you don’t then they give some practical tips on how to try and build this up.
Overall, I find it useful to think about my finances in these terms and I hope you can relate to these too. Next week’s article will look at expenditure for enhancing your life, financial independence and ultimately your legacy. I hope you’ll join me again then.
Thank you for reading. For more interesting articles, visit my blog at www.agelifebalance.com to learn more.