Back when I was in tons of consumer debt, budgeting wasn’t something I really did. I mean, maybe a bit. Possibly. On the occasions I did try and take control and create a budget, it was a half-baked attempt. This was because it frankly scared me about what little money I had left at the end of the month. So it never lasted.
I finally got myself out of that hole and back on the straight and narrow. Having a well structured and automated budget was an essential cornerstone of that process. Healthy personal finance is fundamentally about ensuring you spend less than you earn. And you can only do that if you know what’s coming in and what’s going out. Furthermore, it’s a key component behind the principle of ‘paying yourself first’ and maximising your savings and investments. What I discovered was that budgeting does not have to involve endless boring spreadsheets.
With a little effort up-front, it can be automated and hassle-free. It can propel you towards a healthy financial foundation, leaving you time and money to do what you love, guilt-free.
How to budget like a Pro
Many people struggle to save money and stick to a budget. This is usually because the budget is too aggressive, unrealistic or complex. We believe in keeping things simple and easy to manage. Then you can get on with life without worrying if your money will last till the end of the month.
The budgeting plan we use is one that has evolved over many years of struggling to keep to budgets. It is underpinned by the principle of ‘splitting’ your spending money and your bills money. This ensures your essential bills are paid and on time. As a result, you don’t accidentally spend this money on shopping or something you could do without.
Step 1 – set up a Bills Account
The first stage is to create a Bills Account. This account is going to receive your paycheque and from where you pay your main household bills from. We call these Essential Bills as these are what you need in order to live a basic life. Things like housing, warmth (ie, utilities) and commuting to work.
For this account, we use a traditional high street bank such as Nationwide, Lloyds, First Direct etc. You can use a Best Buy resource such as MoneySavinng Expert to help you pick. High Street accounts are generally the most stable and offer value-added features. This may include breakdown cover, insurance or other features that some people may want to utilise. If you do need these perks, having them within your bank account can be a cost-effective means of doing so. If you don’t, then opt for a basic account and save yourself the account fee.
Once you have your Bills account in place, you’ll need to ensure your household expenses are paid from this account. Where possible, set your bills on Direct Debit to ensure you never miss a payment.
Step 2 – create a Spending Account
Next, set up a Spending Account. This account is going to be used for your discretionary spending and non-essential bills.
What do we mean by non-essential bills? Well, this includes everything that doesn’t keep a roof over your head. Things like gym memberships, Netflix subscriptions and Charity donations etc. All of these you could live without if you really had to.
Note; food should also come out of this account as what we do next helps you set a food budget.
For your Spending Account, we like one of the digital challengers such as Starling or Monzo. These accounts are easy and free to open. They also have some great features that makes budgeting much easier and awesome savings tools that help you visualise your financial goals.
Step 3 – set the budget
Here’s the clever bit. Most people run out of money because it’s difficult to plan for a month ahead. There’s always something that crops up. Pesky things such as Christmas and other people’s birthdays, for example.
First, take your monthly income and then subtract your ‘Essential Bills. You can do this on paper or ideally an Excel or Google Sheets (free with your Google email address account). Better still, owners of the Eat.Sleep.Money Financial Fitness Programme get ready-made spreadsheets all done for you.
Secondly, add 5-10% to this to give you a bit of a buffer. Now work out what you have left over. We call this the budgeting gap and it will be your spending budget.
Divide and conquer
Lastly, set up a standing order to pay your spending budget from your Bills account into your spending account (ie Starling or Monzo). But, here’s the nifty bit – divide it by four and set it to pay your budget weekly. Even two weeks. Why? Splitting your budget into smaller and more frequent amounts shortens the time you have to plan this money for. It will also help you visualise this timeline.
Think about it. If your monthly Spending budget is £400, it can be really tempting to think that will easily last. As a result, you’ll be tempted to spend more heavily at the beginning of the month. By breaking this down into £100 per week, you’ll be less likely to ‘splurge’ early on and run out. If you do end up spending too much, you only have a few days left until your next spending budget payment rather than a few weeks.
Money Mindset Tip: try taking out your weekly budget in cash. This transforms money from the ethereal to the physical and will strengthen your relationship with it. You’ll be much more aware when handing over £30 in cold hard cash than to simply tap ‘n’ go with your phone.
Step 4: is your budget on track?
After you have set your budget, it’s important to check that you are keeping on track. This is where the Starling or Monzo bank accounts come in. From one of these accounts, you can quickly see where your money is going with nifty charts and graphs.
Plus, these apps will show you how much money you are spending each week. Then, based on your spending profile, they will predict whether you have enough left for the rest of the month.
In addition, you can also set a budget for things like food or entertainment by using built-in budgeting tools. Nice.
One of the main reasons people get into debt is by burying their heads in the sand. By regularly checking in and seeing where you are, you will be making huge gains in your budgeting awareness. As a result, you will be less likely to run out of money or fall into debt.
Cut the dead wood
This is also a great time to review your expenses. Can you afford what you are paying for (“you spent how much on takeaways?!”….I used to regularly say to myself)? Do you make the most of that gym membership? Would you like to save or invest more? This is a great time to review whether you can cut some of these costs out. Consequently, you could either give yourself a buffer or boost your savings and investments. Here are a few quick ways to save money fast.
Step 5: get your system down
You may be paid weekly and/or have your subscriptions coming out at the beginning of the month. If so, you may want to put in a bit extra in the first week so you can cover these.
You might also want to tweak the budget you set originally to be more realistic. Typically people spend more than they expect on food shopping and takeaways. This is fine, but if you are struggling to pay back debt or are stretching your cash until the end of the month, then you need to get serious about how you spend. If so, grab the free Induction to the Financial Fitness Programme to really give your finances a workout.
Step 6: budget bigger!
It’s all very well getting ‘ninja’ about day to day budgeting, but you’re going to need to think about bigger expenses like holidays, birthdays and Christmas. (Or just go live alone on a desert island, living a permanent ‘holiday’ and forgetting about the other two. In which case, you’ll be living off raw coconut husk with your best friend Wilson who is a football and don’t need any advice about budgeting). The good news is, there is a solution for that too.
For these scenarios, our weapon of choice is savings pots in Monzo or Starling. You’ll need to set yourself a budget for expenses that come up every year. Let’s use Christmas as an example; you could set an annual budget of £600 for Christmas to cover presents, food and travel etc.
You know Christmas is coming at the same time each year. So why not start setting aside money for it as soon as possible instead of skipping drinks with Santa or maxing out your credit cards, then trying to pay it back after.
So, take your £600 Christmas budget and divide it by 12 months, giving you £50 per month. Next, create a savings pot called ‘Christmas’. Upload a picture of a festive scene and set up a scheduled monthly payment of £50 into this pot. By the time Christmas comes around, you will have some money set aside ready for having a great time without the financial stress.
Now, repeat this process for each of your known annual expenses. This can include annual insurances, holidays, birthdays and annual memberships etc.
I even use this for things that I’m saving up for, such as new threads or shades. I create a Pot and each week I try to have a little left in my budget which I put towards this pot. It’s hugely motivational.
This method ensures your expenses are smoothed out over the year rather than having one big cost that wreaks havoc with your monthly budget. In addition, Monzo or Starling will show you how you are progressing towards your goals and you’ll be amazed at how motivating this can be.
Step 7: budget for debt, savings and investments
You may think it’s odd to lump these two together but in this system, we treat them similarly. If you are in debt, this is an Essential Bill. If you don’t pay it, you are going to face penalties or have your things taken away. No one wants that. Your savings, especially when you are trying to build an Emergency Fund, should be treated in exactly the same way. This is known as ‘paying yourself first’.
Because of this, your debt and savings should be taken out of your Bills Account. This ensures they are prioritised over discretionary spending like clothes and takeaways. Let’s face it, getting out of debt and saving for your financial freedom are more important than clothes and takeaways.
If you want to pay off your debt quicker or increase the amount you save, simply transfer a little less to your spending account. You can then divert this extra cash towards your debt and savings.
Budgeting can be simple, easy….even fun!
The system above is designed as a framework to help you budget without boring spreadsheets. We recommend you ‘pay yourself first’ by taking some money from your Bills Account and allocating them to either debt repayments or a long-term savings account each month. This money should first be used for an Emergency Fund and after that is full, used to build your financial future through investing. This is the system we use to manage our finances. It may need to be tweaked every now and again as your financial situation changes. It’s a framework that you can make your own and adjust to suit your financial position.
What do you think? Do you use something like this already? Get in touch and let us know if you have your own great system, we’d love to hear about it!
Until the next time, here’s to financial fitness
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EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. Investments may go up as well as down and you may get back less than you put in.