Introduction

For most people, the word ‘budgeting’ brings to mind less than positive emotions. Traditional budgeting advice involves trawling through bank statements, saving your receipts and feeling guilty for spending money on anything that isn’t absolutely essential.

There will always be a certain degree of discomfort because you’re making changes to spending habits that you have built up over a long time.

The good news is that, thanks to technology, a lot of the grunt work can be done for you. Plus, the benefits of good budgeting habits are so great that it’s more than worth the effort.

The guide below is a friendly guide to thinking about budgeting. It covers some of the main misconceptions that people have about budgeting, and then we will walk through an action plan to get you on the path to control your spending.

The most important thing to understand about budgeting is that it’s not about keeping track of where your money goes for the sake of it. 

What is budgeting?

The only thing that matters is whether you are managing to spend less than you earn each month, while at the same time putting enough aside each month to achieve your financial goals. If you’re not, then the best case scenario is that you won’t be able to afford the goals you’ve planned for in your financial plan. The worst case scenario is that you’re starting to build up debts that could cause you major headaches down the road.

Either way, budgeting is the process of taking control of your spending habits. That means working out how much you have to spend, and then building good spending habits over time.

Everyone manages their money slightly differently. There isn’t a one-size-fits-all solution to budgeting, but hopefully this guide will inspire small tweaks and changes you can make that will cumulatively make it easier for you to stay on track with your financial plan. A financial coach can also help provide guidance and accountability.

Clearing Misconceptions

Guilt is not the goal

One of the biggest misconceptions around budgeting is that it is designed to make you feel guilty about treating yourself and suggesting you live as frugally as possible. Of course, this doesn’t sound very appealing, which is why so many people put off thinking about it.

The goal is not to make you feel guilty for spending money on things you enjoy, or to try and shame you into changing your behaviour. The real goal is to only spend your money on things that bring you happiness or are really valuable to you. This will naturally include contributing to things like a pension because a comfortable retirement is really important to most people!

If you are reducing the chance of a comfortable retirement because you can’t resist impulse purchases that you later regret – then something needs to be done! If you’re digging yourself into deeper debt because you don’t have a clear strategy for getting in control – then the guide below will help.

By following the budgeting steps outlined below, you’ll be in the best possible position. You’ll have clarity over where your money is going and the confidence to spend on things that are important to you because you’ll know when you can afford it.

Like all good habits, good spending habits are built over the course of time, not in a single afternoon. You can’t simply write down your ideal budget and expect it to translate into reality, any more than you can write out a food plan and expect to lose 10lbs overnight.

Again, this is good and bad news. The good news is that you can focus on changing one small thing at a time, rather than having to overhaul your entire life in one go. The bad news is that you most likely won’t get it all right the first time. You will have to spend some time trying different things before you figure out what works best for you.

How important is budgeting for you?

It’s most likely that you already have an idea of how good you are at managing your spending. Some people are naturals in the sense that they don’t struggle to put aside savings each month and still avoid having to rely on their overdraft or credit card at the end of the month. For others, a deep dive into their spending habits is a more urgent priority.

Some signs that you should spend a bit more time focusing on your spending habits are:

• You’re frequently surprised to find that you have less in your spending account than you thought.
• You are unable to put enough money aside each month to contribute to your long term financial goals.
• You have some short term credit card debts and you’re not sure how long it will be before you have paid them off in full.
• If you had a sudden £100 bill, you would have to borrow money to pay it.

What good looks like

If none of the statements above sound like you, then you’re most likely doing quite well on the budgeting front! 

The most important thing is that you are not spending more each month than you earn. Even if you overspend a small amount each month, over the long term you’ll eventually find yourself draining your savings and getting yourself into trouble. On the other hand, someone who spends less than they earn is at least putting something aside for the future and is growing their overall wealth (even if slowly at first).

Once you are living within your means, the next step is to focus on increasing your savings/investments/pensions contributions to as much as you reasonably can. It will be up to you to find the right balance between putting enough aside to achieve your goals and enjoying your day to day life.

Most importantly, a good budgeter is someone who is in control. They understand their situation, they know where their money is going and they could make changes if they chose to do so.

Six steps to budgeting success

Key Ideas

• Automate the important stuff! Saving should be the first thing you do,
  not a ‘nice to have’.
• Technology makes it easy to keep track of your spending habits.
• Budgeting is all about making conscious decisions about how to spend your money. Stop spending on ‘auto-pilot’ so you can afford the things that matter.

#1 Make a list of your fixed monthly expenses

The first step to taking control of your spending is to look at your fixed monthly expenses. Any bills, subscriptions or other payments which you make every month and where you know the amount is a fixed monthly expense. Most obviously this includes things like: rent or mortgage payments, utility bills, and subscriptions such as Netflix or Spotify.

It’s a really great place to start because for many people the majority of their monthly spending is already determined by these fixed monthly expenses, and it’s so easy to work out where your money is going. Simply look at your most recent bank statement (or log in to your banking app) and make a list of the regular monthly expenses. You should be able to get a list of direct debits that are set up, making this even easier.

Once you have a complete list of your monthly expenses, your first task should be to go through the list to see if you can reduce the amount or remove them entirely from your monthly spending. If it has been a while since you reviewed your bills, it’s highly likely that you are massively overpaying for your electricity, gas, insurance and internet.

There are numerous comparison websites which make the process of searching and switching to new suppliers incredibly easy. Here are some of the most popular:

• MoneySuperMarket – https://www.moneysupermarket.com/ 
• uSwitch – https://www.uswitch.com/ 
• Compare The Market – https://www.comparethemarket.com/

Key Actions: Make a list of all your fixed monthly expenses including what they are for and how much you spend each month. Once you have the full list, calculate the total amount that you have ‘pre-committed’ each month. Then, identify which items in the list you could afford to cut or remove entirely.

#2 Automate the important stuff

“Don’t save what’s left after spending, but spend what’s left after saving.”
– Warren Buffett

The second step is to make sure all of the most important expenses, including your contributions to savings, investments and/or pensions, are automated. As Warren Buffett points out in the quote above, if the goals in your financial plan are important to you, then you have to prioritise them.

It’s not enough to say that you will add to your savings whatever is left in your account at the end of the month, because it’s too easy to fall prey to temptation.

The only exception for not contributing something to a savings or investment account automatically each month is if you have some credit card debt or a personal loan which has a high interest rate. In which case, the priority should be to clear all of these expensive debts as soon as you possibly can.

How much should I save?

When it comes to deciding how much to automatically put into your savings the answer is: as much as you reasonably can. There is no correct amount that is right for all people in all situations. What’s essential is that you understand fully the trade off you’re making between spending now vs saving for later.

If you’re unable to save much because you don’t have anything left after essential living costs then you have to prioritise those things first. However, if you are spending more than you might on nights out on the town or luxuries then you have to make a decision as to whether you would rather, for example, keep those same luxuries or achieve your financial goals more quickly. Only you can decide on the balance between enjoying life’s luxuries in the present and securing a sound financial future. 

This is where a financial plan can really make a difference. It’s difficult to work out in the abstract what your target should be, but your financial plan can show exactly how much you need to save today in order to achieve the goals in your financial plan.

As a result, we strongly recommend aiming to save the amount of money that’s currently built into your financial plan. You can find this by going to the ‘Find Solutions’ tab, and clicking on ‘Spend less’. 

Where should I put the money?

It’s one thing to decide how much you want to add to your savings, but equally important is deciding where you’re going to keep it! The general rule is that money you are going to need in the next 5 years should be kept in savings accounts, money that you won’t need for more than 5 years should be invested, and you should use a pension to save for retirement.

In practical terms, it’s likely that you’ll contribute to a mix of all three, and your financial plan should show how much you can safely afford to invest or add to your pension. 

I can’t save anything!

You might feel like you couldn’t possibly spare any money to put away into savings. This is not uncommon. However, we would strongly encourage you to at least try for a couple of months with a very small starting amount before you give up entirely.

Here’s how you can tackle this situation:

• Set up an account which doesn’t charge you for withdrawing money whenever you want. This could be another current account, or an “Easy Access” savings account.
• Set up a standing order from the current account where you are paid each month. Start with 5% of your salary, taken out as soon as you are paid (e.g. the first day of the month).
• Try to make it through the rest of the month (using the remaining steps below) on just the money left in your account. The vast majority of people will find that in fact they can afford to get by without the money they have put aside.

Worst case scenario, if you really cannot manage and have to go into your overdraft or use a credit card, then you can simply move the money from your current account / savings account back into your main account. Best case scenario, you will discover that you underestimated your ability to manage on slightly less each month and you have contributed to the most important goals in your financial plan. Once you have got into the habit of automatically saving, you can then bump up the amount over time.

Key Actions: Set up a standing order to automatically contribute to your savings, investments or pensions as soon as you’re paid (e.g. on the first day of the month if you’re paid at the end of each month).

#3 Calculate your actual spendable amount

Once you know how much you have in fixed monthly payments, including your important savings contributions, you should be able to calculate what your actual available income is each month.

Most people make spending decisions on the basis of their income from their salary, but this ignores the fact that you’ve ‘pre-committed’ yourself to spending several hundreds of pounds in advance!

By subtracting the total amount calculated in steps #1 and #2 from your monthly income, you’ll find the actual amount of money you have to spend each month. 

This is the number you should think of when considering whether or not to make a purchase. If you earn £2000 per month then spending £100 on a night out might not feel like a big deal. However if your actual spendable amount turns out to be £500, suddenly that night out looks a lot more expensive.

This doesn’t necessarily mean you shouldn’t spend £100 on a night out with your friends. By being more aware of the actual cost of a night out (i.e. it’s 20% of your available budget each month, rather than 5%), you’re more likely to only choose to spend on things that you really value.

Key Actions: Calculate your actual spendable amount for each month. This is your total monthly income (after tax) minus your fixed monthly expenses and your savings commitments from steps #1 and #2.

Write this number down somewhere you will see it frequently.

#4 Build awareness

One of the most common pieces of advice given to people trying to lose weight is that they should keep a ‘food diary’ where they keep a list of everything they eat each day. The idea is that many of our bad eating habits are the result of automatic responses to stimuli (e.g. having a bad day, feeling stressed, etc). This means that we’re often acting on ‘auto-pilot’ when we eat that chocolate bar, and then forget all about it soon after. At the end of the week you’ve lost no weight and can’t understand why because you didn’t even realise what you were eating.

So, keeping a food diary is a way to force yourself to be aware of the habits as you go through your day. The simple act of being aware of what your normal habits are gives you a powerful way to make better decisions in the future.

The same idea applies just as well to building better spending habits. The more you can build an element of awareness into your system, the more power you will have to make better decisions from moment to moment.

Ultimately, it doesn’t matter how you build awareness into your day to day spending. Most likely you’ll have to find something that works for you. Below we have listed a few of the methods that we’ve seen work best with previous clients.

Mobile Friendly Banks

In the last few years a number of new banks have launched which are designed entirely with your smartphone in mind. They don’t have physical branches, but their apps can give you much more insight into your spending habits than traditional banking apps.

One of the best benefits is that you can get an immediate notification every time you spend money, which acts as a powerful way to remind you how much you have spent. This makes you much less likely to overspend on autopilot. The apps will also show how much you have spent each day, and will automatically categorise your spending into things such as groceries, entertainment, etc.

They are all free to use, but here are our favourites:

• Monzo – https://monzo.com/ 
• Starling – https://www.starlingbank.com/ 
• Revolut – https://www.revolut.com/ 

Account Aggregators

If you have a few different accounts already, then you might prefer to use a service that brings all of your various accounts and credit cards into one place. Rather than have to log in to three different bank accounts to work out how much you’ve spent this month, an account aggregator allows you to see a summary of all your accounts.

Like the banks mentioned above, these services can help you categorise your spending and see which areas you could cut back on. They’re also helpful for identifying fixed monthly expenses that could be reduced or stopped entirely. 

The easier it is to see what’s going on with your spending, the more likely you’ll actually do it, and so the more likely you are to keep to your budget!

Here are a few of the best account aggregators we recommend:

• Snoop (Free) – https://www.snoop.com
• Emma (Free and paid versions available) – https://emma-app.com
• Moneyhub (Paid) – https://www.moneyhub.com 

Traditional Banking Apps

Almost all banks have a decent smartphone app these days, which makes checking your current balance a matter of seconds. If you don’t already have your bank’s app on your phone, we would strongly recommend doing so.

Of course, the challenge isn’t only to have access to the information, but to force yourself to be conscious of it at regular times. With Monzo, mentioned above, you can receive a notification every time you spend, but most banks will not have this feature.

Instead, you could set a reminder in your smartphone calendar to check your account balance at the same time every day.

Pen and Paper

If you’re not much of a smartphone user, then you may have to try something more manual. It would be difficult to do on a very long term basis, but you could try committing to writing down everything you spend money on each day. 

This is a bit more hard work, but if you can stick with it for a while it will have just as big an impact. As mentioned above, having to take an action every time you spend will jolt you out of your auto-pilot and make you more aware of how you spend your money.

Key Actions: Find a way to make yourself more aware of how and when you spend money on a day to day basis.

You could use one of the apps mentioned above, or experiment with something completely different. You’ll know when you’ve succeeded when you can correctly answer the question “How much did you spend yesterday?” at least 80% of the time.

#5 Add some friction

Much of the modern world is designed to make it as easy and convenient as possible for you to part with your hard earned cash. To some extent this is a great thing – it is undoubtedly more convenient to use your contactless debit card to pay for things, for example.

On the other hand, this can be a double edged sword. When paying for things is easy, you often end up making impulse purchases that you later come to regret. 

So, another of your key areas of focus should be thinking about ways you can introduce some artificial friction to the ways in which you usually spend money. To continue the analogy from #4, if you would like to lose weight then it would be a good idea to make it a bit more inconvenient to eat your favourite unhealthy snacks. If you have a pack of biscuits sitting on the kitchen table then eventually you will eat them out of habit. You could instead keep the biscuits on the top shelf where they are difficult to reach. Making them less convenient makes it easier to stay on track.

Automating your savings as described in step #2 is an example of friction in the system. By taking the money out of your account immediately, you become used to getting by with less. Sure you could take your money back out of savings and spend it all, but it’s a bit more work so it’s easy to resist most of the time.

There are dozens of ways to add some inconvenience to the way you manage your money. We’ve listed just a few below, but there are bound to be many more that fit your situation. Not all of these will be things you can do right away, but be prepared to experiment before finding what works best.

• Avoid checking too frequently how much is in your savings and investments accounts.
  If you are contributing to a savings account, it can be a rewarding feeling to see it go up each month. However, some people can end up overspending on their day to day budget because they feel they have the back-up of their savings. By making it difficult to see how much is in your savings account, you’ll be less likely to fall into this trap.
  
• Stop online websites from remembering your payment details.
  For example, delete your credit card information on Amazon. If you have to type in your card details each time you make a purchase on Amazon then you’re less likely to make impulse purchases.
  
• Set up different accounts for where your salary comes in and your daily spending goes out.
  Another good way to introduce friction is to set up a new current account to use for your day to day spending. Each time you have to transfer money from one account to your ‘spending account’, you’ll be forced to be conscious of how much you’ve spent and whether you’ve managed to stick to your weekly budget.
  
• Make a 48 Hour Rule
  If you frequently find yourself tempted by expensive purchases, you could consider introducing a strict time constraint on when you can spend more than £50. So, if you want to buy a new pair of shoes you like the look of, then you must wait at least 48 hours before you can go through with it. This gives you a chance to work out whether this is something you really want, or if you were merely struck by a momentary impulse.
  
  Key Actions: Introduce more friction to your day to day spending habits. You can use the suggestions above, or come up with your own. We recommend picking one or two specific things to start with and then adding more over time. You’re not going to be able to overhaul your spending habits overnight!

#6 End of Month Review

Finally, you should at the very minimum, review how your spending has gone at the end of each month. As we said at the beginning of this guide, budgeting is a system you improve over time, not something you tick off the to do list and never think about again.

At the end of the month, try asking yourself the following questions:

• Did I spend more than I earned this month? Did I end up having to use my overdraft or a credit card? If so, was it because I earnt less than expected, saved more than I should, or spent more than I should have?
• Are there are any expenses on my fixed monthly expenses list that I could cut down or remove entirely?
• Are there any purchases I made in the last month that don’t now feel worth it? How could I have made myself more aware at the point of purchase, or introduced some artificial friction to give me more chance of spotting that in advance.
• What could I try next month to see if I can improve the system even more? 
• This is the most important step in the whole process because it’s only by spending a few minutes reviewing your progress that you can improve the system as a whole. It doesn’t have to take more than 5 or 10 minutes to do, because we’re not expecting perfection, only improvement.
• If you’ve managed to stick to your saving and spending targets – congratulations! Take a moment to congratulate yourself and feel the peace of mind and other benefits that come with being in control. The amazing thing about this system is that once you have managed to save up for a big or luxury purchase, you’ll be able to enjoy it with no guilt about treating yourself to something nice.
  
  Key Actions: Schedule a recurring event in your calendar on your phone or computer reminding you to have an end of month review. At each review, ask yourself the questions above and think of one thing you’re going to try doing different for the coming month. Remember to treat yourself when you’re doing well! Life is about enjoying the money you earn, not beating yourself up for spending on luxuries. You simply need to know when you can and can’t afford those luxuries.

Conclusion

That’s all for this budgeting guide! We hope that you’ve found something new and useful. 

Managing your money shouldn’t be a great source of worry or frustration, but equally it’s important enough that it’s worth dedicating enough time to take it seriously. The key to building wealth is not something dramatic like winning the lottery or inheriting millions from a rich relative. The real secret is in the quite mundane process of spending less than you earn consistently over the course of a very long time and putting the difference to good use.

Those who have developed good spending habits live happier lives and are secure in the knowledge that they are contributing to the goals that are really important to them such as buying a house or providing for children.

If you’ve struggled to control your spending up to this point, then hopefully the principles outlined above demonstrate that it’s not as difficult as it might sometimes feel.