If you want to keep your financial review stress free, you've got to prepare. We strongly suggest you have all of your figures written down and calculated correctly before you start your review.
Make sure you include all of your household income including wages, benefits, board & lodgings, everything! And then all of your expenditure like rent or mortgage, utilities, hobbies, and food. Use your bank statements to make sure you get everything down.
Every figure for both your income and outgoings need to be converted into monthly figures. That's because one of the purposes of the review (amongst others) is to figure out your monthly repayments to your lenders.
Preparing for your financial review
An essential skill you'll need to learn is converting all your income and outgoings into monthly figures. For example:
If you spend £50 per week on food, how would you turn this into a monthly figure? You might think you simply multiply by 4. This isn't quite right.
If you think calculating a fortnightly figure into a monthly figure is done by multiplying the figure by two, again, not quite right.
And finally, if you're paid every 28 days (4-weekly) this is not your monthly income.
You debt management provider and creditors will expect accurate figures. Don't worry, if you're scratching your head, we'll show you how to do it.
Correctly converting into monthly figures
The most common conversions you will need to calculate into monthly figures are weekly, fortnightly, and four weekly.
Converting weekly into monthly
Let’s convert £50 per week into a monthly figure.
You do this by multiplying £50 by 52 (number of weeks in the year) and divide by 12 (months in the year).
So: £50 x 52/12 = £216.66 per month
Converting fortnightly into monthly
Let’s convert £50 from fortnightly into a monthly figure.
You do this by multiplying £50 by 26 (number of fortnights in the year) and divide by 12 (months in the year).
So: £50 x 26/12 = £108.33 per month
Converting four-weekly into monthly
Let’s convert £50 from four-weekly into a monthly figure.
You do this by multiplying £50 by 13 (number of 4 weeks in the year) and divide by 12 (months in the year).
So: £50 x 13/12 = £54.17 per month
The four weekly conversion can often be the most confusing, after all there are four weeks in a month, right? Think of it like this. There are 7 day in a week. If you multiply 7 (days) by 4 (weeks) that equals 28 (days). Then if you multiply 28 (days) by 12 (months) that equals 336 days.
The problem is there are more than 28 days in most months and more than 336 days in a year, so if you don’t convert your weekly, fortnightly, and four-weekly figures into a monthly figure correctly, you are dealing with inaccurate figures.
Working out your income
Your income and expenditure will be taken using monthly figures. Your income will need to be what you earn after your tax, national insurance, and work place pension deductions (your net income).
If your income is the same each month then there is nothing to work out, you just use that. If your income is the same but weekly, fortnightly, or four-weekly, calculate the monthly figure (use the guide above if you’re not sure how).
Let’s take a look if your how to work out your income if it’s weekly but fluctuates from week to week. What you need to do is to take as many recent wage slips as you can and work out a weekly average. Around six wage slips should be fine.
Week 1 - £452
Week 2 - £440
Week 3 - £473
Week 4 - £690
Week 5 - £449
Week 6 - £432
Taking the list above, let’s say these are your net weekly income amounts for the past six weeks. You’ll notice that week 4 is the odd one out, it’s much higher than the other ones. Maybe this is because on week 4 you did a lot of overtime or received a bonus.
We’d suggest you just ignore week 4, especially if it is just a one off, and work out your wage based on the other weeks.
To work out the average you would add up week 1, 2, 3, 5, & 6, and divide by 5 (the number of weeks you’ve added together). So, in this case, your average weekly income would be £449.20. You then convert this weekly average into a monthly figure – that is £1946.53.
If you receive benefits, be aware that many benefits are paid weekly, fortnightly, and four-weekly. The only type we know that is paid monthly is Universal Credit. Check your bank statements to find out. If something is paid monthly it should appear on the same date more or less every month, if the date changes, chances are it will need converting to a monthly figure.
Working out your expenditure
There are two types of expenditure. The type that fluctuates and the type that is fixed. Fixed expenditure are things like your rent or mortgage, car insurance, and water. Each month they shouldn’t change.
What’s harder to work out are things that change from week to week and month to month. Let’s take a look at clothing for example, this is the hardest one to work out. You probably aren’t going to be spending money on clothing every month, and if you have children, around September you could spend a small fortune.
If you don’t know how much you spend on average each month, think of it over a different timescale. You might be clueless as to your monthly average but could have a reasonable estimate over 12 months. You can then take that figure and convert it to a monthly figure.
If you’re still unsure, take a look at our guide below. It gives an indication on how much the average household spends on various things such as food, hobbies, and clothing.
The debt solution you choose will determine if you will be subject to expenditure restrictions. With a Debt Management Plan there are no restrictions. In theory there would be nothing to stop you saying you spend £300 per month going to the cinema.
We hope that you agree, £300 per month at the cinema is way too much. The problem is, if this is what you spend, it’s likely that you don’t need a debt solution, you just need some advice on budgeting.
If you do spend this much but you also need a debt solution, the other issue of spending this much, even with a Debt Management Plan, is your lenders do not have to accept your offer of lower payments, and they are less likely to accept your offer if they think you are spending unreasonably.
With the insolvency debt solutions such as Individual Voluntary Arrangement, Debt Relief Orders, and Bankruptcy, there are expenditure restrictions. You can download the guide to the maximum allowances so you can see what you're entitled to.
Keep in mind that for any of the items it is possible to be granted a higher allowance if you can provide a legitimate reason why you need more. For example, if you are diabetic and therefore spend more money on food than the average person.
For more information on how to prepare for your financial review, take a look at our call with a debt advisor blog.