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Budgeting is important, not only to make a plan for our money, but to remove the anxiety many of us feel when we think about money, credit cards and pension. Follow these easy 7 steps to a money smart budget.
The goal – for you to make active choices instead of letting your personal finances happen to you.
Do You Know Where You Spend Your Money?
Yes? Good! If not, you may want to consider finding out.
I thought I had a pretty good idea where my money went but some time ago I decided that it was time to tackle my finances for real. As a first step I decided to calculate what I was spending my money on.
I went through the last year’s credit card, bank and PayPal statements and categorised what I had spent my money on. And I had a chock. Last year I spent over four thousand pounds on clothes, shoes and accessories!
OVER FOUR THOUSAND!
Mind, I did get a promotion last year and had given myself permission to spend a bit extra to treat myself but OVER FOUR THOUSAND POUNDS! I didn’t want to continue spending that much moving forward.
The other thing I realised was that my 28 pound every 3 week nail saloon habit was costing me 485 pounds every year and my highlight and haircuts another 600 pounds.
These are all things to consider.
Now, why wouldn’t I spend this money? I have a good career, a good income and I should treat myself for my success right? Yes and no.
After finally getting a grip on my complete financial situation I realised that I had other priorities and that there were other things I prefer to do with my money.
How are You Spending Your Money?
To learn for your self what you are spending your money on you will need to take the time to do this for yourself. Before you do, you can’t make any decision around if you are happy with your spending habits.
Are they in line with your values?
Is this what you want to spend your money on?
It will take a couple of hours but once it’s done, it’s done, and you will be happier (though slightly petrified if your findings are anything like mine!).
Read More: Value-Based Spending: How to Feel Calm About Your Money
Done? Great. Now that you know what you are spending your money on, let’s make a process to make sure that for every month you are better off, rather than worse. And that makes sure that the money you are spending is in line with your values. With what you want to do with your life.
How to Make a Money Smart Budget
Pete Matthew, Chartered Financial Planner, has a great podcast and YouTube series about budgeting with meaningfulmoney where you can learn more, but these are the steps you need to take:
1. Start Your Money Smart Budget with Your Main Spending
For most of us that will be rent or mortgage, other loans such as credit cards, student loans or car loans, household bills, childcare if you have kids, food, clothes and entertainment.
2. Add a Row For Savings
3. Decide How Much You Want to Spend Per Month
Based on your usual spending.
4. Decide How Much You Want to Save
How much you should be saving depends both on your preferences but also on what kind of loans you have. If you have expensive loans such as car loans or credit card debts, pay those of first.
Read More: Is Personal Debt Good or Bad? – Learn what Debt to Pay Off Imediately
Read More: How Much Should You have Saved for Retirement at Your Age?
5. Start an “Equalizer” Account
Remember that you have some expenses that don’t happen every month, for me these are things like getting my hair done (200 pounds every 4 months), MOT and service on my car (240 pounds per year) and the quarterly repayment for my Swedish student loan (300 pound every 3 months).
If we just let these costs hit us without preparation, it can easily take us off course so we prepare for it by setting off some money into an easily accessible savings account on a monthly basis.
You can easily open this online with most banks and sett up a monthly automatic transfer the day after you get paid. This will make sure that there is always money for those items that you know are coming even though they may not happen every month.
Based on the above, I spend yearly 600 pounds on my hair, 240 pounds on car MOT and service and 1200 pounds on my student loan.
Spreading this out over a year it’s 600+240+1200 pounds = 2040 pounds per year equaling 170 pounds per month into this “equalizer” account.
I use this account for many things in addition to the ones listed here, like holiday savings and Christmas shopping.
Have a good think of what you want to spend your money on and remember that with most banks you can open several simple savings accounts for free, and you can rename the actual accounts so you have separate “equalizer” accounts for things like holidays, making it very clear what the money is for. It can also be quite satisfying seeing your “Holiday” account grow every month!
6. Pay Yourself First
Make sure you set up direct transfers for any expensive loans you are paying off and your long term savings so they go out of your account as soon as possible after you get paid. If you wait until the end of the month , there will likely be little left if anything – it’s human nature.
If you are one of the few people who usually has a ton of money left at the end of the month then feel free to save it but for the rest of us, setting this up automatic makes it happen easily and without thinking, and we make sure that we pay ourselves first, before we start giving money to other people!
7. Automate Everything
Now, let’s do the same with your direct debits and other payments. Let’s make sure that everything that can be automated is, and that the money is taken out of your account as soon as you are paid, making it really easy to see how much is left to spend on the “fun” stuff.
If you have payments going out at different days of the month, and especially if you have big bills that are being paid late in the month (we used to have a 50 pound internet bill going out on the last day before getting paid, and it surprised and disappointed me every month!) you can almost always call and write to ask to have it changed to another day of the month.
It’s a one-time effort that will make your life a lot easier while more transparent at the same time! Win, win!
Money Smart Budget Management
Once you have done the initial work of budgeting, making sure you pay yourself first and set up your direct debits and transfers to your “equalizer” account it’s really up to you how closely you want to track your finances.
If you have used the system I described above, the only money left in your current account is the money that you are allowed to spend on a monthly basis and as long as you are generally keeping within that amount that is enough!
However, if you are more detailed oriented you may want o actually start track what you are spending your money on. This way you will always have a clear picture on exactly where your money is going.
It is completely up to you and as the purpose of setting up these systems is that they then require minimal effort to maintain. Only spend time to track your epenses if you actually find value in it.
Review Your Money Smart Budget
There are two things however that I want you to look out for and that should trigger a review of your budget:
First, you are spending more than your allocated “fun” money most months. If this is happening you have either set your budget to stringent or you need to change your habits to spend less money. This is a good time to take a new look at your spending and see in what areas you really are overspending.
Remember, this is not about being boring and sitting at home all the time. It is however, about making sure that your spending is in line with your values.
Do you want to spend 500 pounds a year on lattes?
If not, maybe it’s time to get a to-go cup and drink your own coffee on the go?
Or even cut down?
Or maybe just get a white coffee instead of the latte with extra caramel?
It’s up to you, but this way, you make active choices rather than letting your personal finances happen to you.
Second, your circumstances change. This requires a more thorough review and we do a deep dive into it in the post When Your Life Changes – Update Your Budget in 3 Easy Steps.
There is more than one way to have control of your finances but the important thing is that you know what you are spending and that what you are spending is in line with your values. There may be some work ahead to get to that point.
Some habits may need to change, but taking it one step at a time and always looking for that 1% improvement will surely get you there!
How to reach your long-term financial goals and not worry about money
Save a lot of money: 14 easily replicable steps to save 65% of your pay
Easy investing for beginners: How to empower yourself financially
Reduce your fixed costs and afford some indulgent everyday luxury!
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