Managing your personal finances (connecting the heart and head to money) whilst … starting a coaching business/service as your first career (post-graduation) by Kim Stephenson (Part 3 of 5)
In Parts 1 to 3 I introduced Sarah and her situation, looked at how we unpacked the details of Sarah’s dreams and gave them more structure and how these linked to her current life situation and beliefs. In this 3rd part of the five-part series I’ll look in more detail at realities of her finances, applying the “head”, a more objective approach to the “heart” of her dreams. In the other parts of the 5-part series, I’ll look at how these were made into practical plans, the “hands” of the process, and how we set up ways to stick to the plans if things went wrong.
Seeing money for money
The parallel I use here is with a route app, like Google Maps. Before you can go anywhere you need a destination, and a starting point. Without both, the app is useless.
We’d got the heart bit, where she wanted to go. We still needed the start point, where her finances were now, so we could plan a route. That’s more head, more about the facts and analysing them.
The heart bit is still important in looking at the money as a tool. Without the inspiration of dreams and goals and the view of money as being potentially useful, it’s hard to motivate yourself to do things you’re scared of or find hard (particularly if you’re only emotionally responding to money regardless of your financial realities). And although, when you consider it realistically, money doesn’t seem as complicated or scary, it does need some focus and analysis to make it into a useful tool.
One reason handling money can seem hard is that our attitude to money often distorts our vision of where we are now. Some people will be blindly optimistic, ignoring reality and setting financial and life goals that are totally unrealistic. Others will assume that their goals are unattainable, and not realise that they’re already within reach. So, getting an accurate starting point is important. That start point requires some analysis, and that analysis requires accurate data to analyse. Both the data gathering, and the analysis can be tricky, for various reasons.
Some people enjoy going through a year’s bank statements, credit cards, receipts etc. to find out where they are. They enjoy the process of making order out of chaos, and putting all the masses of figures into a nice tidy spreadsheet. They get a sense of accomplishment from it. That however can cause a different problem, of getting fixated on having precise figures (which isn’t needed) and metaphorically, sharpening the pencils and arranging things tidily, rather than getting anything productive done. They collect lots of data, then don’t analyse it.
Sarah wasn’t like that. She found digging through her finances boring. She’d got apps and online banking, so all the information was there, but the process of picking everything out, categorising it, finding out where money went, so she could plan and prioritise, was something she’d procrastinate over, and had in the past given up on.
So, we had to find a way to help her organise.
What’s the achievable goal with today’s resources?
Sarah had an idea (in vague, generalised terms) of her destination. That could be refined, broken into goals for, say, six-month, one year, five years and so on. But to make them realistic she needed a starting point – where were her finances now?
Knowing that you’ve got “a lot” of debt, or that you don’t earn “enough”, is not really helpful. It needs more detail. How much is “a lot” relative to income (and hence capacity to pay it off)? How much is “enough”? Is that to pay for everything you might ever want, or is it enough to buy the essentials right now? It’s hard to work that out if you don’t know where the money goes now – is it going on rent, food, clothing, energy bills, entertainment – what are you spending and where? Is the amount you’re spending funded by credit card or loans/credit purchases, does it leave anything from your income?
It requires some “head” work, and that usually needs some “heart” to make sure you can push through the unpleasant bits.
There’s not much point in trying to set a budget or worrying about “too much” debt or “not enough” money, until you really know what the situation is. You might have an unsustainable situation, where you have to spend more than you earn in order to survive. But more likely, you have a situation where, if you know where the money is going, you can focus and priories, set aside money for essentials, put some away to clear debts and build savings and not spend on some things that are “nice” but not worth giving yourself financial nightmares over.
Personally, I prefer biting the bullet, making up a spreadsheet and putting in all the regular bills, the odd payments etc. Stuff that’s paid in annually, quarterly, monthly, weekly or whatever all goes into the spreadsheet, with rows for the various categories that fit your own way of thinking. That tells you what your regular bills and expenses are. – You add in your weekly (or whatever) shop. It’s easier now, because most people use cards (or phone banking) so you’ve got a permanent record. It used to be, with cash, that it was easy to miss small expenses (the odd coffee, newspaper etc.) and have far less than you thought you would have at the end of the month.
You then have everything that, in theory, you’re spending now. You might find that, when you take away those bills from what you have coming in, there’s a hole somewhere (you’ve got less actual money than the figures say you ought to have). That’s when you check whether you’ve forgotten things (maybe going through bank accounts, credit card stamens etc.) And there are loads of sites that give lists of things that it’s easy to forget (like expenses for cleaning products you only buy occasionally), like the MOT and consumables (oil, anti-freeze etc.) for the car, the TV licence and so on. That gives you a pretty good idea of what you are, really spending, including the little everyday costs.
I like to do it that way, but Sarah didn’t.
It was all too much.
She researched apps. There are dozens around, every bank has at least one or two. Many will allow you to categorise expenses, give you running totals (which aren’t useful until you’ve done the next stage, but could be handy at times) and various ways to analyse your money. I don’t like them because they tend to impose the categories of whoever programmed it, or their boss or colleagues, but they’re becoming increasingly customisable.
Sarah picked out one that suited her, fitted with her preferred categories and that gave her a picture of what she typically spent (over a year) broken down so she could see where the money went, and where it went that she hadn’t realised it was going. She could tell when she had big annual bills coming up, or a month where she might have spare money (for example, Council Tax in the UK can be paid in ten monthly instalments, meaning that two months there is no payment to be made)
Income <> Outgoing?
Having a clearer picture of where her money was going, the next thing she needed to know was what she had coming in.
Starting out, this was a tricky one to work out. Some months (or even weeks) she’d be doing well by her own standards. Other months, she made almost (or actually) nothing. You can’t necessarily have nice tidy monthly amounts of bills (some are occasional, annual, quarterly etc.) Similarly, your income might be unreliable, like Sarah’s.
What you want is to know what a theoretical “average” month (or whatever period you want to work to). That allows you to plan ahead. Without that, it’s pretty easy to buy on impulse when you have just got a consultancy fee or a windfall in, and then find the next month there’s no money left to fix the car, or the boiler. Or be panicked because you’re temporarily broke, because an annual bill has to be paid before your income for the last month hits your account.
Sarah had, with the apps, a way to categorise that worked for her. She knew, approximately, how much she was going to be paying for all the necessary expenses (rent, food, clothes etc.) and how much she had coming in.
We looked at the two figures, coming in and going out. Hopefully for you, as with Sarah, there’s a small positive balance. As above, it’s not hard maths. If you have even slightly more coming in than goes out – result. You’ve got something to work with. If it’s the other way round, something needs to change.
As Mr Micawber says, Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
At that point, Sarah could usefully try to budget. She wasn’t likely to get sudden bills she hadn’t included in her figures – she’d checked over the last year or two and put everything into the apps. She knew what she had to pay out, and what she had coming in (as an estimate of an average month). She also knew what she’d actually spent (as distinct from what she had available to spend) and what she’d spent extra money on that wasn’t essential.
Because she could see a small surplus of income over the necessary expenses, she could then start allocating money to the optional things – e.g. savings, clearing debt, leisure activities, social life. She couldn’t simply buy everything she wanted, but she could make decisions about what she prioritised.
If you’re in that situation, great. You can then start to prioritise what you’ll do with your money that isn’t committed, and that’s the next step for Sarah, which we’ll come to shortly. If you’ve got a deficit, or if you need to create more surplus for some reason, you can either get more money in, or you can cut down expenses.
One thing that can be an expense is debt – particularly things like credit cards that are not paid off, hire purchase payments and unauthorised overdrafts that tend to have high rates. Apart from taking on second (or third) jobs, or turning hobbies into income producing side lines, there are ways of generating extra money, selling stuff you don’t need (or really want), for example.
What have you ultimately got to pay, and what have you got to sell.
And a note of potential – have you got time, skills, space or anything that you can trade to bring in more income? Can you rent out things, teach your skills to others or find a site that allows you to set up online courses or something? Do you have potential promotions or raises on the horizon, that will increase regular income?
In the longer term it’s often helpful to prioritise clearing high interest debt. Apart from the fact that you reduce interest payments as you pay off debts, leaving you more money available each month, it has a useful psychological benefit of reducing the stress and anxiety of feeling out of control.
Sarah didn’t have high interest debts, such as credit cards. She had the student loan. She also had lots of interpersonal skills that could be valuable in various contexts, such as in advisory or customer service roles so if she wanted to increase income or have a “back-up” in case her coaching income dipped, she had some options, in addition to teaching or setting up online offerings, as above.
What does the head say about what the heart wants?
Sarah had values and life goals/dreams. She wanted to be professionally respected, ideally making good money. She wanted to help people and to have good personal relationships.
On the financial realities side, she didn’t have a lot spare. She didn’t have high interest debts (like credit cards). On the other hand, she did have a student loan that she’d like to clear. She didn’t have a house or major assets, other than her old car which was needed both for work and a social life.
She had a good group of friends and supportive, if not wealthy, parents. She had the beginnings of a business, and some marketable professional and personal skills in terms of dealing with people and being helpful.
Having a clearer understanding of where she’s starting from (after using the ‘head’) she could map a route out to what it is her heart wanted. Listing out in order of priority (need-want-nice to have), we created a short summary of her practical goals (which included both her heart and head) en route to her destination:
She needed to have the money to build her skills (for courses, supervision etc.).
She also needed/wanted to money to run the business, get over lean periods (and potentially be able to take at least some holidays – even if it was only a long-weekend now and then).
She wanted a social life, alongside living expenses. That isn’t the same as the odd holiday. It’s an ongoing thing. Try to live like a nun or a monk for an extended period, with no social life, no fun, only working or saving and dreaming of the elusive holiday puts you into a “when I get rich I’ll…..” rut. You’d cry (I do) if I recount all the people I’ve known (or heard of) who ended up wedded to a lifestyle of denial, unable to spend on themselves or see that they had the money to do what they’d always dreamed of. You can end up with “jam tomorrow but no jam today”, and tomorrow never comes.
It would be nice to have a pension, particularly with the tax benefits and the effects of compound interest meaning that it’s hugely advantageous to start saving early.
It would also be nice to build up an emergency balance, both for problems like car breakdowns and for business emergencies (like big clients hitting financial pressure and collapsing or cancelling contracts).
It would be very nice to pay off the student debt.
And to at least start saving for her own home.
With a clearer understanding of Sarah’s real priorities, we had something firmer to work with. It gave us the groundwork for me to provide some input, information and observations that would continue to form our ongoing conversations.
It’s easier for me to work from this than it is for Sarah. I’m outside Sarah’s hopes and dreams, and I’ve got more knowledge of the basic facts of finance. That makes it easier for me to be objective about what is an internally driven dream and what she thinks is important because she’s heard from others that it is, or has always believed she “ought” to want. It’s also easier for me to suggest options, or places to research options about alternatives in finance, which Sarah might not have realised were options without some external input.
But it’s still a case of working with her, getting her to make her own decisions in the light of what she wants and her reality, not a case of me as the expert telling her what is “wise” or what she “should” do. For example, for each of her priority goals, we could discuss the relative importance and compare this to the reality and the available options. I wasn’t telling her what to prioritise or do, I was acting as a mirror for her own thoughts and allowing her to evaluate options on her own scale of values, while sometimes suggesting areas of research she could do to see if she could get “more bang for the buck” by tackling things in a different way.
Some of the discussions and tentative plans can be summarised as:
It would be sensible to try, as far as possible, to build professional development costs into the business model. That might mean reviewing rates, but either way, CPD is important (particularly its value to Sarah’s self-image) so trying to “ring fence” some money each month to development was a priority.
The interest rate on the student loans is lower than other debt, so one possibility is to build up emergency funds as a priority. That is a psychological cushion for the financially fearful. If the car breaks down or the boiler goes, there’s some cash around. It can also potentially help the business. If there was expensive debt, it would probably be better to pay that off first, but in Sarah’s case the conditions of the student loan (if you’re not really earning, you don’t have to pay back much, and it will eventually get written off) make it a simpler choice.
A good social life doesn’t have to be expensive. If money’s available, it can make it easier (because you don’t have to think so much about each cab or Uber, each drink, each new outfit, each gift for a good friend to say thanks for being a good friend). But good friends, and family, are close for a reason, you don’t have to put up a front – if you’re short of cash, tell them. If you can’t, maybe you don’t see them as close friends or family after all. The choice is to blow the budget to keep up the front, or work on your skills to tell them. Sarah was in a position to be honest with friends (who were largely in the same position, and could appreciate planning cheaper social activities), and family, who would help as far as they could – maybe by storing stuff or offering a room and board.
Longer term savings would be nice, particularly with the tax relief on pensions and effect of compound interest. But that had to be a lower priority until there was a more stable situation.
Similarly, setting up to buy a place of her own would be lovely – but impractical.
o In the US, a survey in 2023 indicated that 74% still consider home ownership the key to the “American Dream”. It has a higher value than any other indicator, including a comfortable retirement, successful career or a college education. But they can’t afford it.
o A study by the World Economic Forum's Centre for the New Economy and Society showed that younger generations are far less likely to own their own homes than, for example, Baby Boomers.
o Meanwhile, the BBC article titled, “Over-50s turn to house-shares to beat rising rents” indicates that irrespective of age, home ownership isn’t universal. And the reason for that is not lack of desire, it’s lack of money, according to a senior economist at the European Central Bank.
The reality is that getting a foot on the property ladder is tougher than it used to be, so Sarah had to decide whether, certainly for the immediate future, it was a worthwhile objective. Given that it was going to take a lot of resources to even start building up what might be a deposit would use most of her money, it wasn’t feasible. Particularly given that starving the business of funds to save for a property would make it harder to build her business to a level where she could show accounts that gave sufficient income to get a mortgage. And starving herself of any money for a social life, fun, holidays, would hardly be guaranteed to generate wellbeing!
That step of prioritising and testing the ground is one that, as mentioned, often doesn’t get taken. But it’s important. In coaching terms, it’s a sort of “holistic GROW”. You’ve got too many Goals, so you must prioritise. The Resources (and reality) limit your Options – particularly they narrow the number of simultaneous goals you can pursue. Your Will dictates some of the reality and hence the options, in this case Sarah wasn’t willing to live the life of a nun. If she was going to have any social contact, however minimal, and also build up emergency funds so she’d got a more reliable income stream, then other goals (like long-term saving) had to be sacrificed temporarily. It’s where the heart wants things, but the head has to say, “not yet, maybe later”.
Establishing the realities of the situation in order to have a starting point requires patience, courage and a safe space to allow vulnerabilities to emerge and be explored especially when discussing money. Connecting what the ‘heart’ aspires to have with the ‘head’, which objectively shows their current reality, it helps to give a sense of direction of where they can start focusing attention. As with a route app, that helps move towards the desired future. It also moderates how conscientious they will be towards their chosen commitment.
Summarizing what it is I did during this phase of the conversation, what would you do in that situation? What part of the conversation might you give advice, and which part would you coach Sarah? Are they the same?
In the penultimate blog, I’ll share how we converted all of this into practical plans and goals as her personal financial planning.
References:
BBC article at https://www.bbc.co.uk/news/business-62344571 accessed 5/6/23)
Dickens, C. (1850) David Copperfield.
European Central Bank, at https://www.ecb.europa.eu/pub/economic-research/resbull/2022/html/ecb.rb220126~4542d3cea0.en.html , accessed 5/6/23)
US survey in 2023 at https://www.bankrate.com/mortgages/homeownership-remains-centerpiece-of-american-dream/#:~:text=Homeownership%20is%20a%20proverbial%20part%20of%20the%20American,homeownership%20a%20key%20component%20of%20the%20American%20dream accessed 5/6/23)
World Economic Forum analysis at https://www.weforum.org/agenda/2022/01/younger-generations-homeownership-housing-market-wealth-inequality/ accessed 5/6/23)
Kim is a former financial advisor and an Associate of the Chartered Insurance Institute (hence the interest in costs, ROI etc.) and now a Chartered Psychologist, coach and tutor/assessor in neuroscience. He’s written two books on the psychology of personal finance and can be contacted on kim@stephenson-consulting.co.uk or via the website, www.tamingthepound.com.
* I’m qualified in finance and worked as a financial advisor for 14 years, have taught personal finance and am a qualified and experienced psychologist and coach. I do know a bit about both people and money. From that (unique) viewpoint, those ideas are wrong. They assume people are simple, while money is complex and money is more important than people. Neither assumption is even partially true.
