Małgorzata Kwiatkowska: Many people have never consciously planned their own finances.
Sandra Martynów: According to research, we spend an average of 4 hours and 36 minutes a day in front of the TV, 3 hours and 45 minutes a week cleaning, and two hours shopping. During a week, most of us don’t even take 30 minutes to review our finances. In order for this area of life to function better, it is worth paying more attention to it. It really isn’t hard. And we can start by creating a good household budget.
MK: Let’s start with explaining, in a few words, what a home budget is and why it is worth building it.
SM: It is a plan of our income and expenses in a certain period of time. You can design a budget for a week or a month – it depends primarily on how often you earn your income. People employed under a contract of employment and receiving a salary on a specific day each month calculate their finances around this period – the more so because they usually know the amount of their salary. In the case of people running a business, budgeting usually looks a bit different due to the variable amount and varying dates of obtaining revenues.
MK: And why is it worth spending time on it?
SM: I once read that since we spend an average of 40 hours a week working, it would be crazy not to pay attention to the money we receive in return for this work. And it is true – many people focus on how to earn more but not necessarily on what exactly happens with the amount that is transferred to the account every month. For me, the most important advantage of budgeting is the sense of security offered by the fact that I know what amount I have at my disposal and that I consciously manage it. The second benefit is my sense of agency – I tell my money where it should go instead of wondering where it has gone on its own. Learning budget planning skills also helps build confidence. If I did not pay attention to my finances before, and now I am starting to consciously manage them, and I am achieving my first successes in this field, my self-esteem is growing.
MK: So how does one go about creating a home budget?
SM: The most important thing is to start creating it at all. Then there is a high probability that when we start recording individual categories of expenses, we will not forget anything. Moreover, you can always revisit the written plan and correct it, if necessary. Initially, it is best to plan for shorter periods and in smaller steps. If something doesn’t work out, a minor stumble is easier to fix. And it is worth starting with the so-called expense map – listing all costs that we incur. Then, firstly, we need to establish whether we have sufficient resources and, secondly, to make a plan, that is, to distribute the resources among the individual needs. These will be, for example, current bills, groceries, any extra activities for you or your children, but also tiny pleasures such as coffee with friends or going to the cinema.
MK: Managing finances gets harder with the constantly rising inflation. How can one manage to organise a budget in such a difficult situation?
SM: Inflation is certainly a challenge because it means buying less for the same amount. In such a situation, the division of funds into individual categories of expenses must be done with almost laboratory diligence. Budget planning helps to adjust our financial possibilities to the current realities. My original method is “3 × P” – I wanted to summarise the key steps related to budgeting with one slogan.
Step 1: Plan – write down the categories of expenses in great detail, broken down into the fixed ones – monthly or quarterly (such as the next car insurance premium), seasonal (e.g. purchase of new tires, new plants for the garden in the spring) and occasional (gifts for holidays, going on vacation). In this way, we know how much money we need annually, but we also see if there are periods when expenses decrease (for example, in summer, you usually pay less for heating), and then you can spend these “saved” funds on another objective.
Step 2: Put aside or throw away – a careful analysis of the expenses will show us which we can opt out of. Examples? A credit card that we do not use, yet the bank deducts a fee for just having it – every year. Or you have activated an account or subscribed to a program or service that initially may have been free but not canceled in time started generating fees – eventually, money disappears from your account.
Step 3: Practice – is nothing more than implementing new financial habits and practice them every day. As a consequence, we start planning the budget and verifying deviations on regular basis, that is, we may learn what caused them and how to avoid similar mistakes in the future.
MK: Are there any other proven ways to reduce expenses? What can we save on?
SM: There is no one answer for everyone – it is hidden in the analysis of fixed expenses. I often observe an approach such as “it’s only a few zlotys – no savings here”. I disagree because if we multiply one or more seemingly small amounts by the number of months, it may turn out that it is not so small anymore. A review of fees, including for banking services or long-forgotten subscriptions, will allow you to eliminate completely unnecessary ones. Why pay for a bank account when there are institutions on the market that do not charge such fees? Summing up, small savings may lead you to saving up to several hundred zlotys per year, which will cover, for example, half of the cost of car insurance.
MK: Saving is not easy. I also have the impression that often the moment when we start earning more does not become the beginning of better financial management. What to do to turn higher earnings into real savings?
SM: I could say that it is enough to make an arrangement with yourself. In reality, however, it does not necessarily look like this. Remember the principle that the appetite grows with eating? An effective way here is to implement a financial plan and scrupulously stick to its assumptions. It is worth remembering that optimal effective budgeting allows for pleasures and surprises. It is not just about saving and denying yourself everything. When we include our own expenses in the plan, the risk that one day, in a moment of weakness, for example after a random argument with a supervisor or a colleague from the department, suddenly everything we have been so meticulously saving gets spent on so-called mood enhancement, can be significantly reduced.
MK: What other good financial habits are worth introducing?
SM: I can think of two key ones that are worth mentioning. You should spend less than you earn, which means not living beyond your means. You must also absolutely stick to the principle that haste and emotions are not good advisers. Probably each of us has happened to go to the store more than once or twice and, acting on an impulse, buy something that triggered that “wow effect”. It could be a new dress, a car gadget, or too many groceries that were on sale at the time. After some time, however, it turns out that the dress hangs in the wardrobe, unused, we got bored with the gadget before it was even installed in the car, and we threw the food away because there was simply too much of it.
MK: And where are the biggest financial traps waiting for us? Maybe there is a list of the most common financial mistakes?
SM: Someone wise said, “With money we don’t have, we buy items that we don’t need just to please people we don’t even like”. We often fall into the trap of consumerism – we want what catches our eye, here and now. We explain to ourselves that there is no point in waiting and putting aside funds for a given purpose, since you can buy the thing now and enjoy it – and pay for it later. Besides, we sometimes justify the purchase to ourselves, arguing that we deserve something from life, we cannot deny ourselves everything, we work so hard, we feel sad, we earned it. Effective implementation of a financial plan protects against such lapses.
MK: Sometimes the home budget gets out of hand. The reason may be unforeseen situations beyond our control – illness or job loss. Sometimes we bring our own finances to a disaster. What to do when we are already spiralling with our debts? How can we save ourselves?
SM: The most important rule is: don’t pretend that the problem does not exist. Debt will not go away by itself, even if we pretend very strongly it isn’t there. Hiding from a creditor will not solve anything. The problem will only get worse as interest will increase. At the beginning, I suggest contacting the person, institution or company from whom we borrowed money and informing about the difficulties in regular repayment. In addition, it is worth presenting a previously prepared proposal, what amounts and with what frequency we are able to pay back. During such a conversation, you can also ask for a temporary suspension of repayment, to stop charging interest or extend the repayment period. Sitting as quiet as the proverbial mouse under a broomstick and hiding from the problem means that we will not take advantage of any of these possibilities. At the same time, our creditor’s frustration will grow because not only does he not receive the money that should be returned to him, but also does not know why this is happening and what his debtor’s plan is.
MK: Often the reason for financial problems is the lack of basic knowledge of money management. In order to be aware of the consequences of failure to pay off a loan, we must read the signed contract in advance. Each decision should be well thought out and sufficiently informed. That is why early financial education is so important. How to talk to our kids about finances?
SM: To be honest, according to age and child’s financial awareness – and it is worth starting to build it as soon as possible. Often a six-year-old already recognises the value of money, so they can be involved in planning spending on pleasures, also by offering a child first pocket money. In my opinion, if our finances have deteriorated because, for example, the loan instalment has increased significantly, and so we have to limit some expenses accordingly and perhaps even give up some of them, it is worth talking frankly about it with the child, instead of pretending that everything is ok and nothing has changed.
MK: And is it possible to teach a child to save?
SM: It is a process that – just like in the case of adults – is worth planning and dividing into stages. To start involving children in discussions about finances, I often encourage the youngest family members to be involved in preparing a shopping list, treating it a bit like fun, because this is how children learn most. For starters, I suggest that you plan a Sunday lunch with dessert – together. This is also a good time to talk about eating habits. We choose two or three dishes, and then we analyse which products are already in the fridge or pantry and which should be bought, and together we discuss how much the missing ingredients cost. Such seemingly light, but periodically repeated conversations and tasks really effectively build financial awareness in children. A larger-scale task may be, for example, choosing a vacation offer for a family or a camp for a teenager.
MK: What role can pocket money play in financial education?
SM: Many parents think that the mere fact of giving a child a certain amount of cash is enough for learning financial management. But how is this young man supposed to be able to do that? I propose to start by establishing clear rules – when pocket money is paid out and whether there are reasons why the payment may be withheld. We can pay out pocket money to younger children every week – it will be easier for them to manage a smaller amount in a shorter period of time.
MK: We can also encourage a teenager to earn independently.
SM: A summer job is very helpful here – money you earn yourself “tastes” completely different than the money given by your parents. And when a young man or woman earns a specific amount, it is worth considering together what they will spend it on. Are they dreaming of something that requires saving a larger sum, or maybe wanting to spend everything at once on a gadget, snacks or sweets? It’s really worth talking to your child about it all – good habits will be quite beneficial later in life.
MK: It is a pity that many of us do not undergo such education. But you can work on your skills at any age, and I hope that our tips will be useful here. I would like to remind persons covered by their companies’ ICAS EAP Employee Assistance Program that they have access to individual advice on managing their finances. Thank you very much for the interview.
SM: Thank you and I encourage our readers to use our tips in practice.