Is Your Budget Strategy Really Working? — 2 Questions
What is more precious to you — Time or Money? To some degree both.
While it is essential that you are in control about how and where you spend it not easy to carry out in practice. Here are a few questions you should ask of your budgeting strategy:
1-Right now, are you able to feel confident that you are on track?
Feeling in control should be a backbone of your everyday life. It can even support your self esteem and confidence — and why not? Valuing and not squandering your assets should inspire respect!
2-Are you are struggling to make time to review your budget?
Time = money. Spending a lot of time on budgeting can undermine your overall goals by leaving you less energy to make smart decisions or start that side hustle. New habits should be sustainable.
Being mindful with your spending requires confidence and a clear knowledge of where you are. I would like to share how I do my budget now, I always found the idea that you can set a budget for your life (where nothing goes to plan) really flawed. After trying a lot of different approaches, I have found that putting more emphasis on long term decisions and giving a happiness budget to be really helpful.
Warning: Check your beliefs before you keep reading
What I am about to share can be dangerous in one scenario — you should be confident in your ability to start to consider yourself as wealthy (regardless of the reality). If you have a belief that ‘money leaves you’ or that you ‘let money slip through your hands like sand’ this will not help. You should carefully consider who you want to be going forward: carry on as you are OR decide that you will turn a new leaf and tell yourself that you ‘respect yourself and your money and you spend consciously.’ Consider choosing a picture of a role model to put in your wallet or set as a background to your phone for first 3 months. Imagine how they made decisions day to day which helped them achieve their goals. How they had to put their goals ahead of day to day temptations. Or imagine them failing and not getting to where they are today — that waste of potential… tragic isn’t it. Be honest, are you squandering yours?
Now, for a simple 3 step strategy that will transform how you feel.
1 — Think of a Choice You Would Like To Have the Power to Make
It doesn’t have to be a goal, or a vision of you in 10 years time. Those are hard. Just something that you would love to have the power to choose to do (or choose to do something else). Say you want to be able to choose to buy a share in a company you think is cool, or to buy a house, or be choosing to take a really expensive trip of a lifetime in 5 years, or be able to choose from private as well as public school for your child. Write it down.
2-Review Your Accounts
Make a list of all your accounts, include that ISA (or two) the forgotten pension scheme (what about the one from the old job?), if you have debt, check FAQ at the bottom. List how much is in each one and take a minute to celebrate where you are and be grateful for what you have. Things could always be worse and you are blessed to have this opportunity to take better control of your finances. (This is a good time to write a note to yourself about why this matters to you).
Choose two accounts to access regularly and put declare the others forgotten one again. You can admire them from afar but they are the untouchables. Going forward you will only be intimate with ‘Account 2’.
Account 1: Fixed / Essential Spend
These are things you don’t make decisions about day to day, usually these are decisions you make once and cover 1 or 2 year period:
- All income (it is where money comes into your life)
- Rent
- bill payments via direct debit (to get the best price and a way to protect your credit score)
- Long term subscriptions
If you have a regular food delivery that is roughly the same price every time, you can put it in here, otherwise I recommend using Account 2 instead. Same with petrol, if your driving is essential (home to work etc) and is usually costs the same, use Account 1, if it is your indulgence and you are prone to spending more
This account is in the business of keeping you alive (and protecting your credit score).
Account 2: Flexible / Your Living Allowance
This is for all those things you decide day to day, in some cases they are things you could do without. You don’t have to eat out, or get a haircut less frequently. You could make sure you eat before you go grocery shopping and as a result spend less. It is an easy way to track what all the capuchinos add up to.
- Food
- Snacks purchased while out
- Eating out
- Travel costs
- Entertainment
- ….add your own options
This account is in the business of keeping you fed and happy :)
3-Finally, Set Up a Regular Payment to Look Out for Yourself and Your Happiness.
This will be an automatic repeat transfer money from Account 1 to Account 2. The funds that remain in Account 1 will grow, you will be able to make lump payments for insurance for the entire year, have an emergency fund, and after 6+ months maybe put some aside into longer term savings. (If this doesn’t happen after a few months, having slit out the flexible spend it will be easy to review why you are spending more than your income and adjust accordingly).
Choose a frequency: Weekly / 14 days / Monthly.
Having been doing this for a while, I would make this monthly, but if you have a tendency to over spend choose more frequent payments.
Choose an amount: This is very individual
You might want to look back at your spending over the past 1–3 months and work out an average or just set yourself a challenge but do not be too harsh to yourself. You are making a long term decision here, but one you can adjust yourself, the point of the exercise is to feel in control of your spending rather than restricting yourself.
Life is a journey, this is a tool to help you flex to the changes along the way.
Read on for the FAQ.
FAQ
What happens if you run out of money in Account 2?
You need to wait until the really cool version of you that was looking out for your goals and happiness pays out your next allowance. However if it is an emergency, and puts you or your credit score at risk, then it becomes an Account 1 thing.
What happens if I don’t send all of my allowance in Account 2 and there is more and more money?
It means that rather than making yourself happy day to day in small ways, you are saving it up for a bigger purchase that will reward you for all those little sacrifices. It is a way of saving for the next gadget upgrade (that you don’t actually have to have) or a really great trip away that you are looking forward to. You can choose to put it to anything that makes you happy (or even the longer term goal).
When you first start, I recommend doing a no buy week or month, that will put you ahead of the game, by giving you more flex in Account 2 so you are not spending ‘transfer to transfer’.
What If I have debt?
- Decide whether you will be paying it off.
- Use a calculator to work out how much it will cost you to pay it off over 1, 3 or 5 years.
- Look at the difference, and what you could buy with that difference.
- Choose whether you want to have that extra money to spend by paying back more in the short term or whether that is a service that you want to or need to pay for.
If it is a credit card, consider a credit card transfer so you get 12+ months at 0% interest.
Tips to analyse what you are spending on
Many of the banks, offer spending analysis tools, might be worth to take a closer look at your internet banking options once you have logged on.
Monzo, offers these even on their free account; sign up link here.
