The Art of Green Finance

The time between Christmas and New Year means time away from work and normal daily routines for many people. If you find yourself with spare time on your hands, I thoroughly recommend conducting an end of year financial check-up. I use a simple 3 step process, however, if you discover any obvious financial issues during this review process, you may need to delve a little deeper in order to correct the course that you are currently on.

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1. Review your expenditure.

Start by reviewing your annual spending. An annualised view is useful as it takes account of irregular expenditure such as during summer holidays and the Christmas period. Some current bank accounts such as the Starling Bank current account makes an annual review very easy by categorising expenditure throughout the year. If you don’t have this or similar available, take an old fashioned pen and paper and look through your bank statements, noting expenditure in various categories as you go.

Then, compare your annual expenditure to your annual income. Your expenditure should ideally be much less than your income. If your expenditure is more than your income, you have an urgent problem to address. In this case, you should look at your three biggest expenditures to make the biggest impact in the shortest amount of time. For most people this will be rent/mortgage plus heating and electricity, transport costs and food. If your top three expenditures include a category other than these three, then this may explain your shortfall and this area of spending should be addressed urgently.

In the UK, during 2022, the percentage of weekly outgoings spent on rent/mortgage, heating and electricity was 16.5% on average. If you spend a higher percentage than this, consider ways in which you can cut your housing costs. This could include big measures such as moving to a smaller property, or, consider renting out a room in your home. You can earn up to £7,500 tax free in the UK by doing this. After this, read the following AOGF article discussing the energy saving measures with the fastest payback time and discover how much you could save on bills.

Average percentage expenditure on transport in 2022 was 14% of weekly outgoings. Consider how you could cut your transport costs. Walk everywhere that you can. If your workplace is not within walking distance, could you cycle to work? Alternatively, could you work from home on one or more days per week? Failing all of that, could you car share?

The next category is food, accounting for 12% of weekly expenditure on average. Learn to cook from scratch (See also: The Best and Worst Hobbies for your Finances, Rice, Beans and Legumes, What should I Grow to Save the most Money and How to Source Free and Healthy Food). Take a packed lunch wherever you go. Avoid take-outs and limit restaurant eating to special occasions only.

If your annual expenditure is less than your income, but accounts for a larger percentage of your income than you are happy with, your next step is to create a REALISTIC budget. Read the AOGF article on creating a realistic budget here.

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2. Review your Savings.

At least 11 million people in the UK have no savings which means that even a tiny unexpected cost could push them into debt. If you have no savings, do everything you can to save £1,000. If you are on a low income, you may be eligible for the UK government’s help to save scheme which offers bonuses for people saving over a 4 year period.

However, £1,000 should be the minimum savings that most people should have. The majority of people writing on the topic of personal finance suggest saving at least 6 months expenditure in an easy access account. In The Psychology of Money, Morgan Housel suggests keeping a high proportion of your savings and investments in cash or other liquid assets, as an insurance against unexpected life events. Another approach is to keep any money you may need for the next two years in cash. This may include savings for short term goals such as a special holiday or a down-payment on a mortgage. Starling Bank (you can tell that I am a fan of their app!) allows you to keep “pots” of money available for various categories. From early next year, you won’t earn any interest on these pots of cash though.

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3. Review your Investments.

Investing should be for the long-term (at least 5 years but 10 years is better), therefore resist making spontaneous changes during your investment review. Instead, look at whether you are diversified enough across your portfolio. This may also be a good opportunity to check that the companies you are invested in continue to operate in an ethical manner. Check their Sustainalytics profile and consider a “company name + controversies” google search.

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