Financial capability: Making ends meet, controlling spending

By Marianne Curphey

You may think you're making ends meet as long as you don't spend all your money before your next paycheque, even if you're having to scrape the sides of your bank account to do it. And the ability to pass up a sale at your favourite store counts as controlled spending, right? According to a recent study published by the Office for National Statistics (ONS), these two aspects of financial capability go much further than that -- and staying on top of them may be harder than you think.

The ONS' Financial Capability in Great Britain 2010-2012 measured people on six categories of financial capability: organised money management, planning ahead, staying informed, choosing products controlling spending and making ends meet. In the latter two categories, the average person's scores were 7 out of 10 and 6.7 out of 10, respectively.

The study defines controlled spending as preferring long-term financial security to current spending capacity, and making ends meet as being able to live within your means and have more in savings than you owe in consumer credit.

Financial capability:
How do Britons measure up?

This is the third installment in a three-part series on financial capability. Check out the rest of the series:

Part one: Money managing and planning skills.

Part two: Staying informed and choosing products.

Wealth matters less than organisation
Though scores in these areas were among some of the highest of the six categories measured, when broken down by age, gender, household and income, the data tells another story.

For instance, young adults aged 16-24 scored significantly lower in these areas than any other age group, and those older than 65 scored the highest. And while those with lower incomes scored lowest on making ends meet, they scored the highest on controlled spending.

This suggests good money skills are something we learn over our lifetime, and are not necessarily linked to wealth.

"It doesn't matter how much you earn," says Philip Pearson, independent financial adviser with P&P Invest in Southampton. "It's about living within your means. In my experience, people who earn hundreds of thousands of pounds in salary have the biggest debts. They work long hours, are focussed on their job, and don't devote time to managing their finances."

Making ends meet and controlling your spending are closely linked, Pearson says, and the only way to really be in control of your money is to understand your income and outgoings.

"Most people are clueless about what they can afford," he says. "The best way to understand your money is to keep a diary of all your expenditure for 30 days. Record everything you spend, whether by cash, direct debit or credit card. At the end of the month sit down and work through to see where your money has gone, and then draw up a budget."

"When you are trying to make ends meet you must find out just how far apart those ends are," agrees Wilma Allan, the Money Midwife. "It's about discipline. Sometimes it is about being jolted into sense of ‘I can't live like this anymore' and deciding to make a life change.  You finally decide it is time to sort things out and you want to know exactly what your outgoings are. If there is a big gap, you will know what you need to cut or by how much you need to increase your income in order to balance the books."

Based on your results, you will be able to see clearly whether you are living beyond your means, and whether you need to cut back or find a second source of income. You should prioritise living accommodations, transportation and food first. The next priority: savings.

Saving habits also a factor
Francis Hobson, policy and communications officer at the Money Charity, said in an emailed response to questions that saving is a habit that must be built and reinforced.

"At The Money Charity, we believe everyone can be on top of their money as part of everyday life," he said. "There is no right or wrong reason for saving, and whilst it might not change your life overnight, it should help to bring you peace of mind, and even increase your overall well-being."

One way to jumpstart good savings habits is to make small challenges for yourself.

"Perhaps start by saving up for a small expenditure by identifying a simple behaviour change," Hobson said. "You could resolve to save up for a £100 day out by cutting out the £2 you spend on a coffee in the morning. Small, regular savings add up -- it would only take just over a couple of months."

Then, as you achieve small victories, move on to bigger challenges.

"It could be to achieve a dream like buying your first home or having a big trip away, or it could be for a more general aspiration: to ensure you have enough money for any financial emergencies that might crop up," Hobson said.

Allan suggests calculating how much you need for essentials each week (or each paycheque) and taking that much cash out of the bank in what she calls "the weekly wad", leaving the rest to savings. Once you're out of cash, you can't dig into the savings.

"It is the discipline of being on top of your figures," she says. "You might find you have a £100 surplus ... to spend on incidental stuff -- and then you will have enough money spare so that when something unexpected comes up you will be prepared."

 She says staying on top of your money means you can make decisions without worrying.

"Otherwise, you are being controlled and driven by assumptions, fears and unknowns -- and that is not a good place to be."

See related: Many Brits lack emergency funds. Here's how to build yours, How to build a more effective budget

Published: 26 August 2015