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Academy Course #2: Building a Strong Financial Foundation

118118 Money Team  •  November 27, 2024

Welcome back to the 118 118 Money Financial Fitness Academy! Now that you’re regularly monitoring your MoneyFlow and have developed a strong foundation of financial awareness, it’s time to dig deeper into the next steps on your journey to financial fitness. In this session, we’ll cover three crucial pillars that will strengthen your financial health: Budgeting and Expense Management, Credit Health, and Savings and Emergency Fund Building.

Let’s dive into each of these and see how these steps can help you take control of your finances, reduce stress, and prepare for the future.

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  1. Planning, Budgeting and Expense Management: Controlling Your Cash Flow

When it comes to managing your money, creating and sticking to a budget is essential. A well-thought-out budget helps you understand exactly where your money is going, allowing you to make better decisions about your spending.

Step 1: Create a Detailed Plan or Budget

Begin by categorising your expenses into three key groups: essential (“needs”) and discretionary (“wants”) and debt payments. Essential expenses are the basics—rent, utilities, groceries, and other necessities. Discretionary spending, on the other hand, covers non-essentials like dining out, entertainment, and impulse purchases. Knowing the difference between these categories helps you see where you might be overspending and identify areas to cut back.

A good way to reinforce this is by separating essential and discretionary spending in your bank accounts. Consider using a second account for everyday, non-essential purchases. This visual separation makes it easier to manage your discretionary spending and gives you a better sense of control over your finances.

Do not forget to break out your debt payments. Your debt payments are credit card, personal loan, Buy Now Pay Later accounts among others.  These are required monthly expenses. As important as your essential expenses.

Step 2: Track and Adjust Your Plan

As we advised in the last article “Build Financial Fitness: Start with This Simple Daily Habit” which you can read here, start out manually reviewing your bank and credit card accounts at the end of each month.  Over time, when you get a handle on your spending, your patterns and your triggers, you can move to a budgeting app to track your income, your essential and discretionary expenses and your debt payments.

The goal is the same. Review your spending to spot trends, set goals, and see exactly where your money is going. Think of your plan as a living guide—something you’ll adjust as your needs and financial situation change.

Eliminate expenses you don’t need. Go through your budget and cut out anything that doesn’t add value to your life. Maybe it’s a subscription you rarely use or a gym membership you haven’t touched in months. The goal is to free up money that can be used more wisely.

And remember, sticking to your plan sometimes means making tough choices. If you’ve hit your spending limit in one category, try to avoid any further expenses there until the next month. Budgeting isn’t about restricting yourself—it’s about prioritising the things that matter.

Step 3: Curb Impulsive Spending

Impulse buys can quickly derail your budget, but there are simple strategies to keep them in check. For instance, try implementing a waiting period before making any non-essential purchases. For smaller items, wait 24 hours. For bigger purchases, wait 30 days. This gives you time to consider whether you really need the item, often helping you avoid buyer’s remorse.

If you’re shopping online, leave items in your cart overnight. Many online stores will send you a discount code if you don’t purchase right away. It’s a smart way to save if you ultimately decide the purchase is worth it.

Another helpful tactic is to practise self-control with sales. Sales can be tempting, but don’t buy something just because it’s marked down. Stick to what you truly need or planned for. Shopping with a list—and avoiding trips to the store when you’re hungry—can also help you keep impulsive spending in check.

To further manage discretionary spending, try a “no-spend” day or weekend each week. Designate this time to focus on free or low-cost activities, giving your wallet a break and helping you build a savings habit. You might also experiment with leaving your wallet (and your phone with apple pay or google pay on it) at home when you go out to avoid the temptation of impulsive purchases.

Remember financial fitness isn’t about sacrifice—it’s about making mindful choices that align with your financial goals.

  1. Credit Health: Building and Maintaining a Strong Credit Profile

Your credit profile is a key component of financial health. Good credit can lead to lower interest rates, better loan terms, and even increased employment opportunities. But as we said in our article “Build a Brighter Financial Future: Start Your Journey to Build Today” which you can read here, you should not obsess over your credit score or how to improve your credit score. What matters is your underlying financial behaviours. Helping you achieve financial fitness is about helping develop good financial habits for the long-term.

Here’s how to strengthen and maintain your credit.

Step 1: Spend less than you Earn & Pay your bills on time, every time.

The easiest way to improve you financial health is to plan ahead and prepare for the next 30 days of spending. Review your last 30 days. Typically your debt payments are due on the same day each month. Your Salary and Wages are paid on the same day or days each month as well. Your essential expenses are also likely due on the same day each month.  This means that you can anticipate when you will need cash to pay certain expenses and when you will get cash from your income and benefits.  The expenses which do vary each month are your discretionary expenses. In this way, you have the power to control your MoneyFlow by delaying discretionary expenses when you know you need cash to cover upcoming expenses.

Plan for the next 30 days. Review our MoneyFlow examples on how to plan for this in our article “Build a Brighter Financial Future: Start Your Journey to Build Today” which you can read here.  Start with the next 7 days and build up from there.

Be wary of services that promise to improve your credit score quickly. Avoid “credit repair” scams; often, these services can’t do anything you can’t do yourself by managing your credit responsibly.

Step 2: Use Credit Wisely

Credit cards can be a helpful tool for managing cash flow, but they’re best used with caution. Only charge what you can afford to pay off each month. By keeping your balance low and paying on time, you’ll build a positive credit history and avoid the costly trap of high-interest debt.

One of the simplest yet most powerful habits for credit health is to pay your bills on time. Late payments hurt your credit score and usually come with extra fees. Consider setting up automatic payments or reminders to ensure you never miss a due date.

Another money management tip: Avoid closing old accounts unless absolutely necessary. Closing accounts can reduce the length of your credit history, which may have a negative impact on your credit score. The longer you’ve responsibly managed credit, the more stable you’ll appear to lenders.

While we frown on obsessing over your credit score, we do agree that monitoring your credit regularly and using it wisely, you’ll build a better financial future.

Image for Build an Emergency Fund

  1. Savings and Emergency Fund Building: Preparing for the Unexpected

Having a robust savings habit and building an emergency fund are foundational to financial security. Savings provide a buffer against unexpected costs, giving you peace of mind and reducing your reliance on credit.

Step 1: Start Building a Savings Habit

If you don’t already have a savings account, now is the time to open one. Set a goal to save at least one month’s pay as a financial cushion. Keep this account separate from your everyday spending to reduce the temptation to dip into it. While it is generally better to pay off debt before you begin to save money, it is essential to have some savings set aside as a buffer in case something unexpected happens. Setting aside one month of pay is a good cushion to have.

One of the easiest ways to save consistently is to automate your savings. Set up a transfer to move a portion of your income into savings each payday. By automating this process, you won’t even have to think about it—your savings will grow gradually without effort.

Round up your purchases to save extra cash painlessly. Many banks and apps allow you to round up each transaction to the nearest pound, transferring the spare change into your savings. Over time, these small amounts add up and make a difference.

Whenever you receive extra income—like a bonus or overtime pay—consider putting some of it straight into savings while using the rest to pay off your highest APR debts first. Building your savings and paying down debt with bonuses and windfalls is an excellent way to accelerate your financial goals.

Step 2: Build an Emergency Fund

Once you have achieved your first goal - saving one month of income, then you can plan to build a larger nest egg. An emergency fund serves as your financial safety net, covering unexpected expenses like medical bills or car repairs. Start by aiming to save three to six months of essential expenses. This may sound daunting, but break it down into smaller, achievable goals to keep yourself motivated. Again, always think about paying down debt before adding to savings as this will help you achieve financial fitness sooner.

If your employer offers salary sacrifice options (such as childcare or pension contributions), think about taking advantage of them. These programmes reduce your taxable income and can free up money that you can redirect toward savings or debt payments.

Step 3: Manage and Protect Your Savings

Setting smaller, achievable goals makes it easier to build up your emergency fund. For example, start with a target of saving an extra £50 each month. Reaching small milestones will help you gain momentum and build confidence.

To ensure that your emergency fund is there when you need it, avoid dipping into it unless it’s for a true emergency. This fund is reserved for unforeseen expenses, not everyday costs.

Another smart savings strategy is to create sinking funds for anticipated expenses, like vacations, car maintenance, or holiday shopping. Setting aside a little bit each month prevents these expenses from hitting you all at once.

Conclusion

In today’s session, we’ve explored three vital elements of financial fitness: planning and budgeting, credit health, and building a safety net with savings. Mastering these areas gives you control over your finances, helps you make informed spending decisions, and ensures you’re prepared for unexpected events.

Remember, achieving financial fitness is a journey. Each small step you take, from planning and budgeting better to building your credit and saving more, adds up over time. Stick with it, celebrate your progress, and continue making choices that align with your financial goals. You’re building the habits that will serve you for years to come as you build your financial future.

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