Step 2: Can I afford to invest?

This section is about understanding your personal finances so you can make a decision about whether you can afford to start investing.

SPOILER ALERT: most of us at all stages of our lives can afford to start investing, but only if we choose make it a priority.

Managing your personal finances is a really important aspect of life. Being on top of your finances can ensure you avoid a significant cause of stress and anxiety which affects many people. It can also set you up for financial success the rest of your life. There is never a bad time to start taking an interest in you or your family’s personal finances.

Managing your personal finances is a huge topic, and its not something we are aiming to fully tackle here. What we are most interested in helping you understand is whether (after all your mandatory costs) you have enough money left over to start investing.

(Deep breath)…Here goes.

The below few steps are about the very basics of understanding your monthly financial position. In the future we would like to broaden this out to a full blown strategy for revamping your finances. Watch this space.

1. Know your monthly income.

This is about adding up all the money coming to you each month.

Most people in the UK are paid on a monthly basis. It doesn’t matter what day of the month you are paid; the main thing is you receive some income each month.  If you are paid on a different interval (e.g. every two weeks) that’s okay, just convert it to a monthly income for the purpose of this exercise (making an approximation is fine, but better to underestimate than overestimate what you earn in a month).

Importantly, we are talking about net income, i.e. the money you actually receive into your bank account each month after all the various deductions are removed by your employer’s payroll.

You might also have other sources of income, e.g. if you rent out a room in your house, you do extra shift work, or you sell stuff on eBay. If you have any other sources, then add them all together. This represents your monthly income.

If you have income that isn’t very regular, e.g. a bonus, or commission that you might not receive if you have a rough month, its safer to not include this on your monthly total. Its obviously good that you earn it, but you don’t want to calculate your income based on your best ever months earnings, if it doesn’t happen very often.

2. Know your monthly outgoings.

Similarly, this is about understanding how much money is leaving your pocket each month.

Helpfully, most bills get paid on a monthly basis so its easy to add these all up in the same way that you did with your income.

Don’t forget about anything you pay for annually though. If you make a budget that only takes into account your monthly bills and not your annual ones, you might struggle to pay the annual bills when they come around.

Also, if you split some of your bills with your partner, don’t forget to add up only the amounts that you pay.  

The table below should help you think about all your ongoing costs. Remember though, that the below are just the most common examples of your costs. If you have any different costs, like a magazine subscription to ‘Garden Gnomes Monthly’, you need to include it.

Outgoings	Amount
Rent / mortgage
Home insurance
Council tax
Electricity
Gas
Water
Credit card / loan repayments
Landline
Internet
Mobile phone
Mobile phone insurance
Car Tax
Car Insurance
Petrol
Food (supermarket)
Food (lunches / ad hoc)
Coffee
TV Licence
Subscription services (music, film, etc)
Clothes / other items
Nights out / cinema / theatre / etc
Total	£

The most reliable way to add up all your outgoings is to look back through what you have actually spent money on each month. Ideally you would look back over about three months to get a reliable picture of your spending habits.  

3. Know what you are left with.

Now compare your earnings to your outgoings to see what you’re left with each month. Here’s an eample:

It’s worth taking a breath at this point to do some simple checks to make sure you haven’t made any mistakes:

1. Is the amount left over more or less than you were expecting?
2. Do you understand why its different to what you were expecting?
3. If it was less than you were expecting, are you comfortable with this?

SIDE NOTE: If you want to increase what you are left with each month, consider how much of your spending is compulsory vs optional. Are you comfortable with the amount you spend in each of the categories in the table? If it’s not compulsory, it’s in your control to make changes.

4. Decide whether you have enough left over to start regularly investing.

As a guide, you can start investing with as little as £50 each month. So if you have more than this, then “yes” you can afford to start investing. Good news.

You might be thinking that £50 doesn’t sound like much to start with, but the point of investing is that this will grow over time. The most important thing is to start as early as possible. Establishing this monthly habit of investing regularly could stay with you for the rest of your life and transform your financial future. Your circumstances may change in the future and you might have more or less money available each month, but that’s OK as you can make adjustments as you go.

So you’ve got money left over, but should you start investing?

One of the most important aspects about managing your personal finances is to have an emergency fund of cash you can easily get to. Investments don’t usually fall into this category because their value can move up and down at any given point. This is the main example of where we would advocate using a traditional instant access savings account with a bank. Not an account that locks your money away for a year or more to give you a higher rate of interest, but an easy access account.

Why?

Its unlikely you will drift through life without every having some sort of emergency. This could be the boiler breaking down, or even losing your job. In both cases you need to have some cash on hand that you can continue to meet your compulsory monthly outgoings. Its true that in an extreme situation like losing your job you could cut back on some of your outgoings, but the majority are likely to be things that you can’t easily (or quickly) cut back on. Paying your mortgage, rent, water, gas and electricity are all examples. Having an emergency fund can prevent the severe challenges associated with being unable to make these payments and transition you through to better times again.

How big should your emergency fund be?

A simple rule of thumb would be that your emergency fund should be equal to between 3 and 6 months worth of your outgoings. Let’s check back in with Sandra Bullock’s finances:

Concluding points: 

• You can start investing from as little as £50 per month
• It’s simple to understand if you have enough money left each month to start the investing habit
• You can re-prioritise your outgoings to increase the amount you allocate to investing
• It’s important to have an emergency fund

---