Making Cents: Time to PERK up your finances!
WHENEVER I meet people and they want to discuss their monthly cash flow, they invariably say that they want to get a handle on their monthly outgoings and for very good reason i.e. the cost of living has skyrocketed over the past year as have mortgage rates so it’s understandable that people are anxious. And with these various costs changing every other month, it’s difficult to get a handle of what next month’s costs are going to be.
And regardless of what your own particular circumstances are like, I think most people are looking for ideas to counteract their increased costs, so I’m going to put forward a suggestion to you in this article that I’m hoping you might find useful.
But before I do, for it to work or any other idea for that matter, you must know what you’re up against.
Because the first step in trying to reduce your outgoings is figuring out how much you spend, and on what and sometimes this is an area people struggle with. They tend to underestimate how much they actually spend in particular areas.
Their perceptions and realities have different numbers going on. And this probably applies more to those who don’t follow or have created a monthly budget than those who do. People who are on a fixed income and have a budget in place, can account for every cent they spend.
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, right?
You need to know and account for where your money is going and I mean where it’s really going. Don’t just say, it’s on mortgage/rent repayments and fuel and electricity and food, although a large percentage of your income probably is. But you still need to put a number alongside every other area of expenditure.
You might be surprised what you’ll find, or perhaps you won’t, but just find out anyway.
And you need to figure out what your number is, and once you do, you’re in a position to take action.
And when I say number, I mean the difference from what you earn, and what you spend.
Your spending will fall into two different categories i.e. your fixed outgoings and your variable ones. Your fixed outgoings should be easy enough, they are what they are and should be relatively consistent each month.
It’s the variable expenses that you need to watch out for, because they’re the ones that normally people run into trouble with.
And to begin with you may not know if the amounts you’re writing down are absolutely correct or not, but it doesn’t matter for the moment, just get them down and they can be amended later. It’s the act of beginning this process which is very important. But, if you’re very unsure about the amounts, checking your bank statements is a good place to start.
After you have done all of this, I then want you to put one of the following letters i.e. PERK, opposite each spending category, and PERK stands for :
P = Postpone
E= Eliminate
R = Reduce
K = Keep
This idea was developed by the author and financial adviser, Robert Pagliarini.
He’s convinced that people can dramatically reduce their monthly outgoings by spending time analysing and categorising where they spend their money. And the idea is a simple one but it’s very effective and something I’ve used myself, as well as a lot of my clients, all who’ve said it absolutely helped save them money.
So, let’s get into how you use the PERK method.
We know P stands for postponing which means putting off incurring an expense like changing your car, buying a new computer, carrying out home improvements etc.
By postponing certain expenditure, you’re creating or preserving money that may have been used towards servicing debt repayments.
For example, a client of mine was thinking of changing his car earlier this year because his existing loan was coming to an end. But why take on another debt when the car he had was running perfectly fine.
So the €395 he was repaying is now going towards cushioning the impact that his higher mortgage repayments was having on his monthly cash flow.
It’s taking a little pressure off him, and he will change his car maybe next year, so he’s not never going to change it, he’s just postponing it until things get a little easier for him.
And he thought it was such an obvious thing to do, but he never thought about it until he carried out this PERK exercise.
Okay, next up is E and that stands for eliminate.
And what you want to do here is look at all those monthly expenses you can get rid of and if you did, you wouldn’t miss them.
So, it’s looking at those small and sometimes big monthly costs you incur which when added together actually add up to be quite a bit.
When I first read about what Pagliarini was proposing with his PERK system, I thought he made a very good point by saying you need to spend time on this area because there might be expenses that made sense at one stage in your life, but they don’t anymore and perhaps haven’t for a while so it’s time to let go of them.
Next up is R for reduce.
And this is an area where you can make real savings.
For example, can you reduce the amount you spend on takeaways, or on your weekly grocery shopping , or what about if you brought your lunch to work one day per week?
Or can you reduce the amount you spend on home insurance or life assurance premiums?
I remember reading a report from the National Consumer Association where if I remember correctly, that they found that almost half of consumers in Ireland never bother to compare prices to see if they can get better deals with utility providers. And because we don’t we could be leaving as much as €1,000 behind us each year.
And finally, K stands for keep.
These are those areas that are very important to you and when you write the list and you go down through them and the ones not up for discussion, you’re going to put a K opposite them because you’re doing nothing with them. Maybe you can reduce their cost but it’s a cost that will stay constant and you’re keeping it.
So, part of your monthly outgoings list will look something like this:
Change Car/PCP Finance P
Sports/Movie channels E
Life assurance/
Health insurance R
Gym membership K
Internet/Broadband R
Eating out R
Beauty treatments K
New clothes R
Home decoration P
Mortgage R
The above is just an example and what some people will put an E opposite, others will put a K, and that’s fine, everyone is different.
But once you have that list and you know what’s staying and what’s going and what you’re going to aim to reduce, you can then focus your energies into each of them.
And doing this PERK exercise is all about becoming aware of where your money is going and what you are spending it on each month, which, in my opinion, is what people lack the most. And yes, it’s a pain sitting down and going through what you spend your money on each month, but I’d say give it a try, nonetheless.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie