by Richard Smith
We live in a capitalist era, which means we are inescapably bound to require money in most aspects of our ordinary lives. Whilst the UK Government has state-sponsored initiatives for the teaching of social responsibilities such as ‘citizenship’, there appears to be a gap in education around personal finances, such as what a credit card is and how to create a personal or household budget. One could argue that this should be a matter for parents rather than the state, though there does seem to be a gap in public and parental understanding when it comes to personal finances and financial responsibility. This article aims to shed some light on this topic.
Understanding the concepts
As a Catholic, personal finances are an important concept to me because, rightly or wrongly, money is an enabler in today’s society. We can use it to look after our family, support the Church, donate to charity, or send our children to university. If I can do away with financial wastage this may enable me to do more with the income I have. £20 saved may be £20 more in the Sunday collection, or £20 more to help pay the bills, or some extra pocket money for the children.
We all have some way of benefiting from building an understanding of the concepts of prudence and financial independence, which are intertwined with personal finances and responsibility.
Financial independence is simply a scale that shows the extent to which we are financially empowered to live without reliance on debt and with the freedom of choice. The picture below illustrates a number of different categories or “stages” of reaching independence, although prudence doesn’t necessarily mean that our sole aim as Catholics is to reach the highest level. Nonetheless, we can each educate ourselves about concepts underlying personal finances regardless of where we are on the scale, and maybe even identify a few things we could change to improve our own personal circumstances.
Financial dependence can mean living from pay cheque to pay cheque or without an income, and perhaps dependent on funds from a student loan or from family or friends. It means you depend on something or someone to be able to cope with basic financials needs, such as meeting bills or buying necessities.
Some stages of life will uncontrollably put you in a state of financial dependence; being a student is one such scenario. This isn’t necessarily a problem, though it isn’t a sustainable financial state. So, assuming you want to improve your personal financial position, you should try to remove financial dependencies as soon as reasonably possible and reach a more self-controlled and manageable state.
Being financially dependent is an undesirable position; after all, one is not in control of one’s life and could be at a high risk of defaulting on important payments. More broadly, it is undesirable because you don’t have the ability to look after yourself, let alone any dependants.
As the head of our domestic church, we should strive to be prudent with our finances so we can wholly serve and protect the best interests of our family. Financial responsibility is the idea that one must ultimately take ownership for managing one’s own finances and eventually the finances of your family. From making sure there is enough to pay the bills, to planning ahead to finance that house extension, somebody has to manage it. The man should step up and take on the responsibility with grace.
Financial independence is where you are able to get by without financial troubles. You may have paid down or paid off credit card debt, you may have some savings to protect against potential adverse scenarios (a “rainy day fund”). You may even have paid off your mortgage or built up some passive income (money earned where you don’t have to work for actively, such as interest income from letting out a property or from bonds / shares) that reduces your dependence on working in order to get by.
Money can help you manage and mitigate many negative challenges facing you and your family. However, it can also be the source of greed and envy, so this is an area where we should carefully tread. Mark 10:25 states that it is easier for a camel to fit through the eye of a needle than for a rich man to get to heaven. Avarice is a sin.
Not giving to charity can be a cause for concern; particularly if you are hoarding wealth for yourself instead.
Establishing control over financial addictions like gambling, drinking and smoking, or other entertainment can also be a prudent starting point to regaining financial control of your life.
Two key categories when it comes to personal finance
1) Income. This is the money coming in. This can be increased by finding new income streams (such as investing in different assets like stocks and shares, or letting out the spare room of your house), or by getting a salary raise.
It can also be increased in net terms by reducing expenditure, after all it is your net income that matters, which in budget terms is income less costs. It is a simple accounting equation, and you are made better off by reducing costs just like you are when you increase your income.
2) Net worth. This isn’t how much you have coming in but what value you have financially. It is a snapshot of what you own, such as the combined value of your equity share in your house, the value of your possessions, bank account balance, etc.
Considering your financial position
- Think about your income and your expenses, and whether you might be able to budget better or reduce unnecessary expenditure. This may enable you to be less financially stressed.
- Think about any debts you have. If you are able to, you may benefit by paying down any high interest debt you have. This could reduce pressure on you and your household. This may be credit card debt, or perhaps even a student loan.
- Think about whether you are familiar with how you manage / spend your money. If you don’t feel confident that you know what you spend on utility bills or how much you spend on going out, then I’d recommend looking into the practice of budgeting.
There are many good YouTube videos on the topic, such as this one.
One good starting point is to create an excel file and list your income, and then categorise all of your expenditure. If something looks too much, then investigate it and perhaps take some steps to reduce expenditure that seems excessive. You shouldn’t have to be an accountant to understand how your finances are- there is plenty of information available, and there are many benefits to having your finances under control.
- Think about whether you have a medium-long term financial plan for your finances. It is beneficial to have an idea as to what you want to work towards.
If you’ve recently graduated from university, thinking about how you might save up for a deposit for a house might be a good idea.
If you are expecting to be a father soon, think about the costs you need to prepare for when you have children. Perhaps you could start putting money into a university fund for your children. If you’re later in life, then thinking ahead to retirement and how you’re going to finance it may be a good idea.
Pulling it all together
When coming across articles like this, it can be tempting to think that it is not possible to become more financially independent and to balance the many other priorities in life such as raising children and supporting your family. On the contrary, smart management of personal finances should help and assist living a devout Catholic life, not erode or impede it!
Even if we can make a small but positive change to how we manage our finances now, this may make a surprisingly large difference to our finances in the long term. It may enable you to get to a position where you don’t have to worry so much about finances, rather than worrying about whether you will have to choose between paying a bill and feeding your family.
I don’t suggest that there is a magical formula to swiftly achieving complete financial independence. Whilst some people truly do transform their lives, financially or otherwise, a more realistic target for us would be to start with our current financial situation and try to take small steps to deepen our understanding of how to manage our money to best enable ourselves to live a life in accordance with God’s will. We could promise ourselves to read a book on our next holiday perhaps, or we could even set ourselves the target to read around the topic for 10 minutes a week.
If we lack financial literacy as heads of the household, then this prevents us from realising our potential. It increases the likelihood that we work for money (often working long hours!) but don’t see much of it, or that we aren’t able to use the money we earn for good or divine purposes. We should strive to prevent this by investing some time in understanding how we can use our role to protect the financial well-being of our families.
Some examples of good practice
- Keep a “rainy day fund” sufficient to maintain yourself for 3 months or so. The aim is to enable the payment of living expenses, rent, bills etc, in the event of unemployment. If you’re more risk-averse, then having enough for 6 months is pretty safe. Not everybody is fortunate enough to do this though.
- See salary rises or irregular cash inflows as funds to save rather than spend. Put this kind of income straight into savings via a standing order, after perhaps using a small amount of windfall to treat yourself.
- Pay bills and set up standing orders for the day after you get paid. This way, you don’t see that money as “income”, which is good because you should be considering your disposable income (i.e. amount after taxes / mandatory expenditure like bills) rather than your gross income when thinking about how much you have available to spend.
- Strategically review your finances every few months. This doesn’t have to be too in-depth, but you need to know roughly speaking how you’re doing, whether you need to change your spending habits etc.
- Review your bank statements regularly. You shouldn’t be paying items from your credit card bill, for example, if they are fraudulent.
- Refrain from adjusting your level of expenditure upwards when your income rises as it leaves you no better off, because your net income stays the same. If you can maintain the same levels of expenditure whilst seeing an income rise, you’ll become better off.
- Consider incorporating healthy charitable contributions into your budgeting exercises, to act in line with Christ’s teachings.
- Sometimes it is wise to consider the financial situations of those that are close to you, as you may need to give them assistance if required and if you’re able. It would be embarrassing to not offer help if a close family member was struggling and you’ve got more than you need.
- Periodically review your standing orders and direct debits. Having a regular amount go out your account each month is something that should cause you to periodically assess whether it is worth it. For example, I cancelled my Netflix subscription when I worked out that I wasn’t getting my money’s worth. Many people just leave their standing orders like for the gym despite not going, and hence lose loads of money. If you are under financial pressure for example because your child’s tuition fees need to be paid upfront in one go, then re-evaluating whether you really need all of the subscriptions that seem to accumulate may enable you to identify where you can cut costs.
- Transparency with your other half. Recognising that finances can be a source of conflict for couples can enable you to take steps to prevent this. Even if this is discussing what both of your expectations are in relation to the joint account, or requesting that any big-ticket expenditure be discussed first before making the purchase, this can increase trust in your partner and may prevent any potential disagreements.
Richard Smith works in accounting & finance and has studied it for the past 6 years, in academia and in chartered accountancy classes. The topic of financial independence and financial security / responsibility is of personal interest to him, and he aims to promote a better understanding of personal finances amongst the lay faithful.