My money MOT
A lot has changed in my life over the past 12 months, but the biggest shift has been becoming a business owner and founder.
I have worked in a variety of organisations for several decades and, until recently, I had no reason to expect this to change. But when the unexpected happened, I had to pivot, and I decided that it was time to become self-employed by bringing my business concept to life.
I am happy with my decision to start a business. I work fewer hours, have a better quality of life, and believe that my company has something good to offer to the world. Burt there is no hiding from the fact that not earning a regular pay cheque means that some things in my financial life will have to change. That is why I have decided to do a ‘money MOT.’
What is a ‘money MOT’?
A money MOT – or personal finance audit – is when you review your income, expenses, debt, and investments, with the aim of gaining an understanding of your financial position.
Doing this allows you to see what is working and what needs to change. Even the simple act of deciding to perform a money MOT can be telling. Does the mere thought of doing one make you feel anxious? You might feel that you do not know where to start, or have concerns that you need to make improvements, but will not be able to. These thoughts are undoubtedly uncomfortable, but they are also valuable. They could be signals that you need to act, even if just to gain insight into where your finances currently stand.
How to
Step one: get in the right mindset. It is difficult to make changes unless you know what your current position is, so if you are worried about what your money audit will throw up, try to think of it as a positive and helpful exercise. Anchor yourself to the possibility that your money MOT could help you find ways to secure improvements, rather than focusing on your fears and concerns about what you might find.
Step two: gather your documents. Include payslips, tax papers investment, credit card and bank statements. I like to ensure that I pull together statements that cover the last 12 months because this helps me to spot patterns throughout the year and any regular pain points. Include your budget and will if you have them, insurance policies and an up-to-date credit score. You can check this for free using sites such as Experian.
Step three: assess your spending and look for patterns and outlier expenses. Does your income cover your expenses? By subtracting your liabilities from your income, you will quickly see if there is a shortfall. Even if you are not living beyond your means, go through your bank and credit card statements and see if you can find any expenses that you can cut out or reduce. E.g. you might be paying for a monthly gym or app subscription that you are not using. I found a Headspace subscription that I had no idea that I had taken out. You might also notice that you have developed some expensive but unnecessary habits, such as buying takeaway coffee three times a day.
You should also look at how much you are spending on the basics – household bills, rent/mortgage payments, regular spending on going out, clothing etc. Ask yourself if you are happy with these numbers, or whether any or all of them are making you feel squeezed.
If you have investments, you should also look at their performance. Check how much, if any, of your ISA allowance you have used as this is a tax efficient way to save. Lastly, check the balance on your emergency fund.
Step four: consider your financial goals. Ensure that you think about the short-, medium-, and longer-term financial ambitions. Are you on track to reach your targets? If you do not have any firm goals, now would be a good time to think about what you want to achieve, and by when. You should now also be able to write down a list of what is working financially and what is not based on your assessment of the past 12 months.
Step five: create a plan. How can you improve your financial position over the year ahead? Ahead of carrying out my money MOT I knew that I needed to create a new budget to account for the change in how I earn my income. My MOT highlighted that I also need to:
1.Update my tax details
2.Make changes to my will
3.Ensure that I use my remaining ISA allowance when I save
4.Despite attempts to cut back, I still eat too many takeaways and buy coffee out far too regularly
5.I need to shop around for a new internet contract as I might be able to get a better deal
6.My emergency fund took a few big hits last year, so I need to reallocate savings into it
7.Review my insurance policies. I took an immediate look at my home insurance documents and I was able to make an instant £50 saving by switching from a monthly to an annual payment.
8.Create a weekly budget. I switched from a monthly to a weekly budget for part of 2024, and I notices that I stuck to it more often than I did my monthly budget.