You don't HAVE to spend it, you know

My last 2 posts looked at the two main areas of the money pyramid: Your essential housing costs which should account for about 30% of household income and your neccesary spending which should account for up to 50% of income. We now move on to that elusive last section, the non-essential spending. This will include things like gym membership, socialising, unsecured debt and the miscellany of life. This should roughly be about 20% of your income.

The psychology of debt means that you should approach your finances in this order, you need to be sure that these areas of expenditure come after everything else is paid and in good order. If you feel that you are spending well out of the proportions I have mentioned here, you can either contact me directly for advice or contact one of my Fund colleagues on 0800 056 2424. I will be covering methods of dealing with debt in the coming weeks, so you might also want to wait for that post if you feel it's not urgent.

If you've been following the posts, you know that I believe that every penny we bring into the household is a prisoner and is only released for the best of reasons! I have no issue at all with spending money and for me to say otherwise would be hypocrisy. However, what I have learned over the years is to make sure that if I spend it, I have it in the first place and to be more careful about planning for events and expenditures. We have cultivated a 'must have' culture and we no longer are able to wait to consume the goods we want, be it a car, new phone or holiday. I don't think that we can re-cultivate this mind set overnight, but it's worth remembering if something is worth having, it's worth waiting for.

Control of your finances is the key issue in all of my threads, and this spreads to this area. If you have a gym membership, do you know how much it is and do you use it? Have you checked the best price for your broadband, cable and telephone packages? Do you need a landline or could you save money using mobile broadband?

When we reach this stage of financial scrutiny, people will often cry that they have done everything I suggested and on paper they have a surplus of £200 a month that seems to disappear before the next payday comes. I have long ascribed this disappearing money to the Evil Money Fairy who comes by at night when you sleep and takes £20 notes from your purse. The only way of trapping and humanely catching the Evil Money Fairy is to keep a spending diary for at least a week and preferably a month. Put all your ATM reciepts into your diary and try to make a note of where you spend the money. You'll be surprised at how many times you take money out for milk and you won't convince me it costs £20 per litre. Scrutinise your bank statement and be confident that you know what each and every transaction stands for.

In short, start to take full and total control of your money and let it know that you are the boss if it and your money is not the boss of you.

Next time, I want to look at how households manage money and some good techniques to control direct debits. After that, I will look at debt before moving on to savings, insurance and pensions.