In this session of the MeaningfulMoney Podcast, I talk about how to budget. A working budget is essential to getting your finances in shape, but it needn't be a hassle to do. I share some great tips to put your budget largely on auto-pilot so it takes you just half an hour a month and 10 minutes a week to keep track of your money. If you get this budgeting right, you're well on your way to guaranteeing financial success. Interested? Let's dive in…
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How to Budget – Introduction
If I had to distil financial planning into just one key practice, it would be simply: spend less than you earn. This simple (but not easy) practice will ensure financial progress. There is more to financial planning than just this, you'll need to learn to invest wisely, and insure against unforeseen problems for example, but without spending less than you earn, you'll never get anywhere.
The only way to ensure you spend less than you earn is to set up, and stick to a written budget.
No-one gets excited about budgeting, at least not before they get into doing it. But when you see the level of control you're going to be able to get by putting a budget in place, you will get excited, possibly for the first time when it comes to your money.
There are a few reasons why people put off budgeting:
- They see it as boring – it doesn't need to be
- They don't know how to do it – it's really dead simple
- They're worried about what they might find out! – This is an immature approach. Need to man up!
Like so many things, we may put off budgeting, but once we get on and do it, we wonder why we were worried about it at all. I has some great comments proving this was true after I posted video Episode 235 – How to Budget, and Episode 236 – A Budget Example.
So what do you need to KNOW to help you get started or get back on track with your budgeting?
Everything you need to KNOW
1. A budget should be proactive, not reactive
In practice, this means that a budget is a plan, not a debrief. It is forward-looking, not backward-looking.
When I took over the running of the family finances from Jo a few years ago, I used software to track where our money was going. For ages I used Quicken, now I use YNAB, which stands for You Need A Budget.
This was great for reporting, with pretty pie-charts helpful for looking back. Software is also really helpful for remembering what bills are coming up, thanks to recurring entries.
But the problem with my method is that I was always looking back. I knew where our money was going, but wasn't looking ahead and telling it where to go. It was reactive, or backward-looking.
No-ones plan by looking backward, but by looking forward
Budgeting is about actively deciding where your money will be spent this week or month. I know this sounds obvious, but I always thought that I was budgeting because I could tell you to the penny how much we spent on petrol last month. But I never looked forward…
2. A budget must be written down
The reason I have shownotes to these podcasts is because it's hard to retain much information at a single hearing. Distractions get in the way. If you're driving while listening to this, you should get the gist but probably won't be able to write anything down that particularly peaks your interest.
Similarly, you'd have to be superhuman to remember all the transactions from your bank account the previous month and your plans for the coming month. Unless a budget is written down, it aint going to happen.
You need to be able to refer to your budget throughout the month, so unless you have a photographic memory, you're going to need it written down, whether this is in paper form, or in software like YNAB.
3. A budget must be as frictionless as possible
If I'm going to do something consistently, I need as low a barrier to entry as possible. For example, I'd use the gym a lot more if I had one at home! The hassle of driving and taking my work clothes to the gym, doing the workout, showering, getting dressed and then going to work all present a barrier to entry which might stop me from going regularly.
I'm more likely to go if I prepare everything the night before, but even then…
If the thought of budgeting is putting you off sitting down and doing it each month, you need find ways to make your own life easier. Take the path of least resistance and make it a frictionless experience, as far as possible.
For example using computers is my way of making things simpler – I use YNAB to keep track of transactions, and an Excel spreadsheet to summarise and to plan. This might be horrible idea for you! So you must do whatever it takes to make your own life easier.
Do this, and budgeting shouldn't take more than an hour a month at first, and you will soon get this down to half an hour. And then 10 minutes a week to track your progress – That's doable, right?
Everything you need to DO
1. Have two current accounts
This is the best tip I can possibly give you for making budgeting frictionless. You should have two current accounts:
- Bills Account – for regular bills, direct debits and standing orders, also regular savings and debt repayments
- Spending Account – for day-to-day spending
On payday, make sure you get paid into your Bills Account, and then work out how much you need to keep in the bills account to cover all your bills until next payday.
Then transfer the rest to your spending account, which is where you exercise day-to-day control.
Because you have set up your bills to be paid automatically, you only now have to think about the ‘discretionary' and variable spending categories, like food and fuel. Fewer budgeting categories to remember and track reduces friction and makes decision-making easier.
2. Pay yourself first
I confess I nicked this from David Bach's excellent book The Automatic Millionaire [affiliate link]. The subtitle of this book : A powerful one-step plan to live and finish rich. The one step is to pay yourself first.
In other words, put money towards your future before anything else. If you don't do this, and instead say “we'll save whatever's left at the end of the month”, you'll (probably) never save anything.
The order for paying out expenses depends on if you have debt or not
If you have debt, you should make your debt payments first. We'll be talking more about this in the next podcast session. You need to decide how much you're going to pay off this month, and do that before you pay anything else.
If you have no debt (except your mortgage), then you should pay into long-term savings first
Then the order goes:
- 2. Short-term savings for annual bills, or holidays, or for Christmas
- 3. Direct Debits for regular bills
- 4. Daily expenditure
My Monthly Budget Spreadsheet helps you with this [right-lick to download]. As you work from left to right on the sheet, you are addressing your spending in this order.
3. Work on a monthly basis
Try to set aside one hour at the top of every month. In this hour you'll look back at the previous month and look ahead to the coming month
- What (if anything) went wrong last month?
- Did you overspend? How much by? Should you have foreseen that overspend?
- Where did the money for the overspend come from? Credit Card – emergency fund?
- How are you going to pay off/replace that money?
- What bills/larger-than-usual expenses are coming up this month?
- e.g. larger than usual petrol bill, or a month with lots of birthdays
- Discuss this with your partner
- May know some upcoming things that you don't
Then set the budget for the coming month, informed by last month and your discussions. Feel free to build in a little bit of slack, but not too much – Too much leads to loose control.
Well done: You have set the parameters for the coming month, and planned your spending – IN ADVANCE!
4. Review your budget weekly
Now you need to track your spending throughout the month to ensure you stay on track. This should only take 10 minutes per week.
Keep track of your spending throughout the week – either write it down, or enter it in your software of choice. (YNAB comes with iPhone and Android apps which sync automatically)
You should be able to see if you're roughly on track. If you divide the month into four weeks, and you're two weeks in, you should be about half way through your budget.
Fore example, if your food budget is £600 for the month, after two weeks you should be about £300 in
Reviewing weekly enables you to pivot if something comes up, and to make tweaks to the monthly budget on the fly if necessary.
So if a tyre goes on the car, you can tweak the budget to decide where the money fro the tyre is going to come from? – This is why you build in some slack
If you just work from month to month, you won't be able to react quick enough to life's little challenges – you need micro-adjustments to stay on track.
So that's everything you need to KNOW and everything you need to DO to achieve success with your budgeting.
Did I forget anything? Do you have a suggestion or tip which works for you? Do you have any questions? Leave them in the comments below and I'll reply as soon as I can.
Also – if you have a question for the next podcast which will be about debt reduction, you can leave a voicemail question on my feedback page.
If you like the show, please give me a review and rating on iTunes – thanks so much!