Everything we need to know about managing money is summed up perfectly by Mr Micawber in the Charles Dickens novel David Copperfield: “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Or, to put it another way, spending more than you earn will only lead to trouble.
It’s the simplest of concepts, yet each day millions of us break that golden rule – our outgoings galloping ahead of our income. Sometimes this is unavoidable – we all have unexpected expenses that can push us into the red (an expression dating from a time when accountants would write negative figures in red ink) but if we don’t bring ourselves back to black quickly, then the problem can rapidly escalate.
According to the Money Advice Service (MAS), which offers free online and telephone support to anyone with money concerns, more than eight million people across the UK are in debt. It’s a problem that can affect all genders, all classes and all ages, yet despite this, many people suffer in silence. Feelings of guilt, shame and fear can make it hard to ask for help.
Debt charity StepChange works to de-stigmatise the issue and urges any of us who are struggling to talk to our relatives if at all possible, or to contact one of the many specialist organisations for advice.
Owing money can be enormously stressful and can be a significant contributing factor to mental illness, so finding support is essential. Falling into debt can happen to anyone, as Kim’s* story illustrates. Even on a low wage Kim had managed to live within her means, but the breakdown of her relationship five years ago had a catastrophic effect on her finances.
“When I moved out, my monthly outgoings soared,” she says. “I had to pay a deposit, rent, cover all bills myself and buy things for the flat. That was really the start of my problems. Then, that same year, I needed a new car, my two best friends’ daughters got married – so there were hen nights, presents and hotels – and, to cap it all, if you’ll forgive the pun, I needed root canal treatment. All my meagre savings went on the deposit and everything else was paid for with money I didn’t have – credit, in other words. I just fell into a hole of debt that just got deeper and blacker. I really couldn’t see a way out.”
Kim eventually resolved her situation by finding a better paid job, moving into a flat share and confiding in a relative who was able to give her an interest-free loan to clear her bills. “Approaching my uncle was the best thing I could have done. In an instant, he set me free, and helped me find solutions. I’m in my late forties and I hate the fact that I’m in shared accommodation. It’s a massive compromise, but there was no other option. I’ve had to cut my cloth according to my means and the flat share allows me to stay on top of my spending.”
Kim’s experience highlights the value of having an emergency fund – a pot of money to draw on if necessary. MAS recommends that we each stash away enough to keep us going for three months, and while that sounds great in principle, it remains an impossible dream for the millions who are described as “chronically broke, year in, year out” in Thriving, Striving or Just about Surviving, a report looking at economic security and modern work in the UK, published by the Royal Society for the encouragement of Arts (RSA) last year.
The survey, which looked at 2,000 British workers, showed that 41% of respondents had less than £1,000, and 32% less than £500. Other studies suggest that the reality might be a great deal worse: a 2018 study by the Skipton Building Society, for example, found that over 60% of 25- to 34-year-olds had no savings at all.
But why is this? Why do so many of us, irrespective of income, struggle to save? The answer, says psychologist Richard Wiseman, professor of the Public Understanding of Psychology, University of Hertfordshire, is because spending is so much easier than saving: it seems that we’re naturally more disposed to go for the instant hit – a coffee, a night out, a takeaway – than the longer-term option of planning for our futures, be that setting up an emergency fund, our retirement or a mortgage.
Graham Bentley, an expert in behavioural finance and the psychology of investing, and the founder and MD of investment marketing consultancy, gbi², puts it another way. He says that spending is gratifying, specific – what we want is right there in front of us – and delivers immediately. Conversely, the rewards of saving are delayed and often attached to abstract ambitions – someday, who knows when, we’d like to have our own home, or be able to take a year off work to travel. The future is nebulous; the present tangible, and we want our treats and our good times in the here and now.
“We know that abstract objectives are difficult to plan for without a specific target,” says Bentley. “Without a savings ‘habit’ people will prioritise near-term goals and put off long-term investing and saving until it’s too late.” James*, is all too familiar with this scenario. “My parents tried to encourage me to save for things, but to be honest, they were probably too indulgent. I’m an only child and for years was an only grandchild, too, so I pretty much got what I wanted, when I wanted it. I had friends who did chores for extra pocket money, and who were taught to save, but my parents never enforced anything like that.”
As an adult, James says he made the mistake of thinking that living in the moment and planning for his future were mutually exclusive, so he made no provisions whatsoever. “It pains me to think of the money I’ve spent without having anything to show for it. I want to propose to my girlfriend, but I can’t just yet because I can’t afford to buy her a ring and I want to be traditional about it. Having that incentive is helping me spend consciously and cut out all the frivolous, needless purchases that I used to make several times a day. Now if I want to buy something, I ask myself one simple question – ‘do I need this?’ If the answer is no – which it invariably is – I put my wallet back in my pocket and walk away.”
James’s comment about his upbringing echoes what psychologists have believed for a while – that our attitudes to money, like so much else, are shaped by our childhoods. “Our relationship with money can be very complicated,” says Dr Roz Halari, clinical psychologist at Cardinal Clinic and research fellow at the Institute of Psychiatry, Kings College, London. “It’s deeply rooted in our psychology. We see people who hoard it, but seem incapable of enjoying it, and we see others who have enormous difficulties keeping hold of it beyond pay day. How people are raised plays a huge part – did their parents view money as something they could rely on to keep them safe, or make them happy, or did they treat it as a necessary evil, associating it with greed and avarice.”
Upbringing is one factor that influences our spending habits, but there are several others besides, says Dr Halari. Social media and peer pressure, which can drive consumerism; the march towards cashless societies, which is turning money into a virtual asset that sadly produces all-too-real debt; personality – some of us are prone to impulse buying and are naturally more materialistic than others; and self-image – for adults and children, shopping can be a coping mechanism and the acquisition of the latest toys, clothes and gadgets a way of boosting self-esteem.
Importantly, none of this means that our relationship with money can’t be changed. It can. A predisposition to impulse buying and our parents’ attitudes towards money do not have to be our own. We might need help to form new spending habits but with the right advice we can reframe our relationship with money and let go of the stress and anxiety it may have caused us in the past.
If you are reading this feature and feeling uncomfortable about your finances, please don’t suffer alone. Organisations such as the Money Advice Service (moneyadviceservice.org.uk / 0800 138 7777); Pay Plan (payplan.com / 0800 280 2816); Citizens Advice (citizensadvice.org.uk / 0344 411 1444) and debt charity, StepChange (stepchange.org / 0800 138 1111) all offer free advice and can help you. You may not be able to see a way out of debt, but they can.
3 mindful spending habits that will save you money
Pete Matthew, author of The Meaningful Money Handbook, shares his budgeting tips.
This underpins everything, and if you can’t stay within your budget, you will always run the risk of falling into debt. To stay solvent, you have to spend less than you earn, which sounds simple enough but is difficult when wages, particularly in major cities, haven’t kept up with the cost of living and, specifically, with the cost of housing. Budgeting can involve enormous compromise – you may need to find cheaper accommodation – and always involves being intentional when you spend. You can’t afford to be passive – you have to think about every purchase and limit unnecessary expenditure.
Have a safety net
Again, this takes work but is essential. Life can change in an instant – you can lose your job, become ill, split from your partner, and without an emergency fund to keep you going, you could end up in trouble. I advise people to aim for enough to cover six months’ expenses – it may take a while to reach that amount, but stick with it. And if you get a pay rise, use that money to boost your fund. Its purpose is purely to keep you and your family fed, warm and housed if disaster strikes.
Debt is a killer
It contributes to broken relationships, mental illness and even suicide so is to be avoided like the plague it is. The worst debts charge high interest and normally accrue on things that diminish in value or are a very temporary band-aid. Credit cards fall into this category and so do pay day loans. These are the debts that must be cleared first. Believe it or not, there are also good debts – these have low interest rates and give you something that appreciates in value. Mortgages and student loans are good debts.
Main image: Getty Images.