This week is special. Quite a few months ago I made the decision to start a budget…
I’ve always had credit card debt (some days this was the only way I could eat during vet school) ever since I was 18 and got that promotional mailing offering a card. I’d also had an overdraft which came with my student account when I started university in the UK. This caused me problems moving abroad to study as my bank no longer classed me as a student and put crippling interest on this. I managed to scrimp and save to clear this and by the time I graduated as a vet my overdraft was history.
Credit limits
However once I graduated and starting earning my credit limit on the card (which started as just £200) kept increasing and increasing. The more I used the higher it went. And then when ordering a new computer I was offered interest free credit to spread the payments over 12 months. I used this to get a slightly better computer than I could otherwise afford. I knew this was going be something I would use for a few years to come. Then this limit also started increasing.
Before I knew it I had several thousand in short term debt over credit accounts with what I thought were reasonable rates.
Financial Education
Unfortunately finance is not something covered routinely in school. And I did not know anyone that was able to teach me either. In fact I did not even know it was something that I needed to learn. I’d considered one of my European friends strange for the way they budgeted everything. I was so naïve. I just bought what I wanted without thinking about it or planning it. In fact I rarely even bothered checking my bank account apart from payday to see what was due in.
The eye opener
I randomly started reading a book called How To Own The World. This was the first time that I’ve ever learnt about money. And actually some of it made sense. However what I found scary was the power of compound interest. This is how credit cards work. And why they are so profitable. And why what I thought were reasonable rates were in actual fact horrendous.
I also learnt that compound interest could work for me as well if I started investing. I was not sure about this so I opened an ISA in 2018, left £400 in it and forgot about it until earlier this year. When I came back to it my ISA had increased to over £500.
If this was the power of investing and gaining money with no work – what about the interest on my credit cards?
Starting a Budget
So I picked up the book again. It advises to clear all your debt (as it is expensive) before starting investing. Also recommended is starting a budget and working out where your money is going and planning spending. They recommended You Need A Budget – a website and app that apparently was easy to use. When I first read the book I’d tried the free trial. Looked at it. Decided it was too complicated…
Come April 2020 after seeing my ISA had increased over £100. This time I decided that I was going do it properly. I added all my accounts into the software. Then added everything since payday. And realised that I had a negative net worth. My debt outweighed my income. I added my pension onto this as a tracking account just to make myself feel better.
So with the budget you are only allowed to budget money you have available sat in your account. This was new for me as I always went for a credit card if it was not in my account. However I started to find when I did this that I had money left at the end of the month (especially as I’ve stopped buying so many books). This money was then used to pay off more of the debt.
Setting goals
YNAB actually lets you set goals. So I created goals for all my credit accounts to be paid off by October. This automatically calculated how much I needed to pay each month to reach this. And even better each time I used a credit account it moved the money in my budget categories to the credit account automatically for payment. No more out of sight out of mind.
My budget is something I check every couple of days now to keep updated and add new transactions.
This week I cleared all of my credit account debt. I am debt free. It feels amazing.
Looking forward
The second part of the How To Own The World book is all about building wealth and investing smartly. It uses an example of how compound interest can turn £250/month with a gain of 8% a year into a million in 20 years. It’s not a quick get rich scheme, however if I can retire comfortably I will be happy.
Finance is something that needs to be learnt, and taught. I would highly recommend this book, starting a budget if you do not have one, and getting rid of that debt.
