'I have no money left at the end of the month' - Expert spots major flaw in spending

Question

Liam, I’ve been separated for the past two years, and I have no money left over at the end of each month. In fact, I’m running a deficit of about €600 which I’ve been making up from savings, but they are running very low and I’ve only about two months reserve left and after that I’ve nothing. I need your help please.

Answer

Not knowing what this reader was spending their money on and how much in different areas, I sent him a monthly budgeting tool, so that I could see what he was up against. Not knowing or having this information to hand, would have made it impossible for me to help him.

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. And in fairness he did complete the budget tool in full, warts and all, and this was my response and advice to him.

Four numbers immediately jumped off the page when I reviewed what you sent on, the first being the amount you’re spending on food, drinks, and shopping. It was accounting for 42% of your net monthly income.

Which seemed unusually high, but when I looked at what was behind this number, it wasn’t the amount you were spending on food or lunches, it was the amount you were spending on cigarettes. As you know, or maybe you didn’t until you completed this exercise, they’re costing you €112 per week and because you are buying them from after tax income, they’re really costing you about €12,000 a year.

The second category that was high was the amount you are paying on loan repayments i.e. €623 per month, which was accounting for 20% of your net income. The acceptable % in this category would be repayments that aren’t greater than 10% of your income each month, so it’s twice what is considered the norm.

And the third area that was high as a % of your monthly income was the amount you were paying in maintenance for your two children. The court appointed amount you advised you have to pay was €920 per month which was 29% of your monthly income.

The rest of what you were spending your money on was fine, but these three areas alone i.e. cigarettes, loan repayments and maintenance accounted for 63% of your income so it’s not surprising you’re running a deficit each month.

And typically when you’re running a deficit of outgoings over income, the reason is because you’re either spending too much or you’re not earning enough or a combination of both. And I think the blockage with you is some overspending and under-earning.

You can’t do anything with the maintenance payments and nor would you want to, and you can’t do much with the loan repayments either because you advised that they have already been restructured, so the standout area to spend less on are those cigarettes.

And easier said than done, but it’s the one area you really need to focus on to see if you can reduce how much you’re spending on them.

And reducing this cost won’t solve your cash flow problems either, but it will help.

What you also need to do is earn more.

If you cut back on your cigarettes by a third, you’ll save €152 each month. And if you managed to do this, your monthly deficit would be about €448 and that’s how much more you need to earn each month, and when you account for tax, it means you need to earn about €10,000 more each year.

And can you do this? Can you make yourself more valuable to your employer so that they’d pay you more? Can you work more hours and maybe do some shift work which you said might be available? Are there other employers that would pay you more?
Failing these solutions, you’re going to have to look for a second, part-time job that will pay you €448 each month.

And there’s only so much you can reduce your outgoings by before you reach a floor where you can’t spend any less and I think you’re at that point apart from those cigarettes, but there’s no limit to the amount you can earn, which is why you need to focus on it.

So, the solution to your cash flow problems is to (a) cut down on the cigarettes and (b) earn more and I’m sure it’s something you probably already knew but putting a number on both and knowing what you have to do with each I’m hoping will help.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie