David Hillier's Finance Classroom

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A Simple Three Step Guide to Improving your Personal Finances

I know I focus on Corporate Finance, but a surprising number of people have asked if they can use what I teach to improve their personal finances. Without a doubt, the concepts applied to business can be extended to individuals, as well as non-profit organisations.

In this article, I draw upon standard Corporate Governance principles to create an objective framework for personal spending.  In the principles below, I focus on optimising financial decisions, maintaining financial discipline, enhancing transparency of your decisions, and monitoring performance.

Key Corporate Governance Principles

(If you want to cut straight to the three steps, just skip this section. Academics like to explain the theory underlying their recommendations, so please indulge me!).

The principles I draw upon are the following:

  1. There should be an effective framework for financial decision-making;
  2. Resources are employed to maximize the wealth of all shareholders (i.e. you);
  3. Stakeholder (i.e. your partner/family) interests should be reflected in all decisions;
  4. All decisions are completely transparent;
  5. Managers (i.e. you) are held accountable for their decisions.

You’ll be surprised at how easy it is to adapt these to the personal level.

In the following 3 steps, I propose a structure for personal financial decision-making that replicates the business decision framework seen in modern corporations.

I have steadily iterated and improved on these 3 steps since 2012 (four years ago) and can attest to their effectiveness. If you think you can improve on these further, please let me know.


The Three Steps

Step 1: Create a savings plan and spending targets for the next month

In personal finance, strict budgets don’t work.  Unanticipated events regularly destroy the best plans and it’s impossible to keep to very strict spending limits.  In the corporate world, businesses keep a cash float to deal with unexpected liquidity shocks and building up a cash reserve is essential.

Calculate Recurring Spend, Savings, Discretionary Spend and Emergency Fund for Month:
  1. At your monthly spending review, subtract all fixed recurring expenditure (such as mortgage, rent, car loan, etc) from your total income.
  2. Of the remaining funds, choose how much you want to save over the coming month and transfer that amount into a separate savings account.
  3. What you now have left is for unexpected and discretionary spending. Aim to spend only 80% so that 20% of your remaining money is left for emergencies.
  4. You’re now at the end of the month and hopefully there has been no emergency.  Whatever you have left, put into an emergency fund to deal with any one-off spending shocks (replacement central heating, car repairs, etc.) that may occur in the future.

Your take home pay is £2,000 and your fixed recurring spend is £1,400 (this is your mortgage, telephone, rates, grocery budget, etc.).  You have £600 left for savings, discretionary and unexpected spend.  You plan to save £200, leaving you £400 for discretionary/unexpected spending. Target  80% of this amount (£320) is for discretionary spending.  The residual amount (£80) should be kept aside for emergencies.

Tip: Calculate your total annual vacation costs (flights + hotels + taxis + spending money), divide by 12, and include this amount in your fixed recurring spend so you have enough when holiday time comes around.


Step 2: Each month identify one of your repeating expenditures and shave 5% off the spend

Companies continually seek efficiencies and the same should be done with personal finances.  In any one month, choose one of your spending categories and cut a permanent 5% from the recurring monthly spend. This may entail renegotiating terms with your suppliers, switching suppliers, or cutting down/back on usage.

Recommended accounts to target:
  1. Mortgage
  2. Car Loan
  3. Insurance (home, car, buildings, life, mobile phone, travel, or dental)
  4. Utility Bills (electricity, gas, water)
  5. Phone (home, mobile)
  6. Credit Card Interest
  7. Car Fuel
  8. Satellite or Cable Subscriptions
  9. Groceries
  10. Home (Furnishing, maintenance, garden)
  11. Internet spending
  12. Clothing
  13. Dining
  14. Entertainment
  15. Music
  16. Food Carry Outs


Step 3: Carry out a Monthly Spending Review

Reviewing and monitoring your monthly spend is one of the most important tasks one can do. At your monthly spending review, objectively assess spending performance over the previous month against each spend category (i.e. mortgage, groceries, eating out, etc.). Identify spending requirements for the coming month (including one-off expenditures) and target one spend category for a 5% efficiency. Always look to create efficiencies where you can.

Checklist for Monthly Spending Review:

Important: Only choose from one of the questions listed below each month.  Cycle through the questions so you revisit each area every six months.

  1. Did you spend money on goods/services you didn’t really require?
  2. Did you throw out food? What did you buy too much of? What is your monthly/weekly/daily food bill?
  3. Is your mortgage/rent too high? Can you get a better rate elsewhere?
  4. Are you paying too much for electricity and gas? Can you get a better deal elsewhere?
  5. What is the total cost of your car (monthly car payment + monthly fuel cost + monthly road tax cost + monthly car insurance + monthly maintenance/servicing)? For some of these, find the annual spend and divide by twelve to get the monthly amount. Is it substantially cheaper to take public transport/hire taxis?
  6. Is your spending balanced across all areas of your life?

That’s it!

Example Monthly Spending Review

Let’s finish off with a detailed example.  You have £2,000 net monthly income and have worked out your recurring monthly costs are £1,400.  You plan to save £200 this month, leaving you £400 for discretionary spend/emergencies.

Monthly Checklist

Let’s choose the first option from our monthly checklist (remember to do a different item each month).

Did you spend money on goods/services you didn’t really require?

Using your spreadsheet, itemise everything you bought/spent over the previous month and allocate to a spend category (e.g. groceries, mortgage, mobile phone, media and TV).  Tally these up and calculate the cumulative amount you spent for each category.  Look at each transaction and ask yourself if it was urgent AND necessary.  If it was both, then fine.  However, if this wasn’t the case, then it was discretionary spend and could have been postponed or avoided completely.

Make a commitment to reduce, avoid or postpone spending in one category over the next month.

Spending Review

Next we pick an account to target 5% spending efficiencies.  The first one I would choose is groceries as it is easiest to change and control.  Assume your average total monthly groceries spend  is £800.  Since 5% of £800 is £40, you should look to reduce your grocery spending to £760 over the next month.  This is equivalent to cutting back by £10 a week, which is definitely achievable.


After carrying out the Monthly Spending Review, you would have committed to the following:

  1. Reduce/Avoid/Postpone spending in one of your key spending categories as identified in the review;
  2. Aim for 5% reduction in grocery spend.

Try it out yourself

By going through these simple steps each month and consistently applying financial discipline, your money situation will definitely improve over time. It doesn’t take long at all to do the Monthly Spending Review and you will certainly see improvements in your personal finances within months.

Happy saving!

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Video: Can Corporate Managers Exploit Inefficient Markets?

I end my video series on Efficient Markets and Behavioural Finance by asking if corporate managers can take advantage of potential inefficiencies in share prices.

As you will recall from previous videos, markets tend to be efficient in general but there are periods when investors can be irrational.  It is precisely at this point when corporate managers should look to exploit mispricing opportunities.

One thing to remember is that most research carried out on market efficiency has used developed country data (such as from the US or Europe). This means that there is much less evidence on market efficiency or behavioural finance in emerging markets or less developed economies.

In this week’s video I cover four different areas where managers may be able to proactively respond to undervalued or overvalued share prices through corporate decisions.

However, at the personal level, managers can also benefit through trading their own company’s stock on their personal trading account.  A whole raft of research has shown that managers have excellent timing ability when it comes to trading for themselves.  If that is the case, it is a good bet they should be able to do the same for corporate decisions.

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Video: Efficient Markets vs Behavioural Finance – Who Wins?

After a fairly deep dive into the foundations of both efficient market theory and behavioural finance, we’re now at the point where we can compare and contrast both interpretations of how market prices are formed.

For some reason, finance academics feel the need to choose one approach or another, and I don’t believe things are as simple as that.  Basically, there is no compelling argument in favour of either approach.

When I was a young fresh faced lecturer back in the 1990s, to argue that Efficient Markets was not valid would have curtailed my academic career faster than it would have taken me to leave the building.

Fortunately, things have changed now.

Today (7 October 2016), I woke up to the news that the British pound had collapsed by 6% in 2 minutes.

Was this rational? Very unlikely.

As of writing, the reasons given are a rogue trading algorithm linked to the potential effect of Brexit (if anything, it potentially shows what will happen if the possibility of a hard exit from Europe actually happens).

Almost immediately, the exchange rate quickly reverted to previous levels, which suggests that in general the foreign exchange market is efficient over longer periods as traders respond to mispricing.

This is what you face when interpreting market price movements.  Be wary of simply jumping to the most obvious conclusion.

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New Video: Are Markets Irrational? A Very Quick Tour of the Evidence

I’ll start off by saying there is no consensus on whether stock markets are irrational. If you read through recent research on the matter, many papers show evidence of investor irrationality. At the same time, you could argue that the process of academics actively seeking out ‘new’ anomalies to get papers will undoubtedly uncover some patterns/relationships.

Are these patterns actually real? or are they simply random statistical patterns with 99% of other unsuccessfully tested models discarded and left unknown to the world?

Without a doubt, behavioural finance is getting a lot of media attention, and it is probably the case that this is driving many new investors to take advantage of what they see as new market anomalies.

Paradoxically, it is essentially this behaviour that Behavioural Finance argues will happen: uninformed investors pursue irrational strategies because of market sentiment and prices change as a result!

My view, for what it is worth, is that markets can be irrational for periods (such as in the aftermath of big events, or during rare times of sustained positive/negative market sentiment) but for the majority of time they act as if they are efficient.

I believe this on the basis of the broader population of research studies that either find market efficiency or assume it as a foundation to their own research methodology.

If you want to know more about some of the studies that have explored this topic, enjoy the video.

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New Video: An Introduction to Behavioural Finance

In this video I break apart the efficient market conditions as presented by Shleifer (2000) and explain how these can be violated in practice.  I’ve taken a descriptive approach so that even if you haven’t considered rationality in finance before, you should understand what I’m saying.

I also promised to give a link to Daniel Kahneman’s book, ‘Thinking, Fast and Slow’.  Here it is:

Thinking, Fast and Slow

New Video: Tests of the Efficient Markets Hypothesis

In this new video (less than 15 minutes) I discuss a number of empirical tests relating the all three forms of the Efficient Markets Hypothesis.  It is a good primer for those about to start their dissertations or projects and are short of ideas.

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Back Online


It’s been a few months since my website was hacked and everything was lost.  As you can imagine, it’s fairly demoralising for everything to disappear but with the new academic term about to begin, I thought I would give the website another go.

The site is now called David Hillier’s Finance Classroom because I plan to use it as a  pedagogical resource for my own students and those who have purchased any of my books from around the world.  I’ve got some good ideas to help students and if I have time, I’ll put these up in the near future.

For now, I’m continuing with my youtube videos until I finish the full course based on my book, Corporate Finance. However, I’ll be branching out into other areas of finance and business as the material builds.

I hope you find the site useful and it helps with your studies, whatever level they may be.  Please get in touch if you have ideas for improving what I do or you have comments/queries on my books.


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