Budgets – you either love them or hate them. This morning I read Root Of Good‘s post on his last years budget which kick-started my thinking. J Money is a great salesman for budgets. I am less convinced. In my experience budgets work like diets, as soon as you set one up, you are tempted to over-spend / over-eat. Almost as though once I start thinking about being sensible, my inner child takes over, stamps her feet and says “Won’t!”.
Update: After writing this post, I came across Ms Liz Money Matters, and she had an interesting take on budgets – do they encourage to spend more because ‘it is budgeted’? One to think about….
I am great at keeping track of my overall finances, investments, net worth etc, but less good at tracking individual spending. My older son once kept a note of everything he spent for an entire year. A bit of a marathon to say the least. He reckoned it ensured he didn’t waste money. He was right, but I just didn’t have the stamina. It can also be a good idea to switch to cash for one month, because it makes you realise where your money is going. You can read my previous article here.
How do I analyse my spend today?
Several times each year, I look at all my bank accounts and work out where the money has gone. About once a year, I take a full download, and go through it line by line. I then use this as an indication of what our daily spend rate is, and hence how much we are saving. We spend well within our means, and we are good about saving. However, on our report card we would get marked as ‘could do better’.
So Why change?
I put money away into separate accounts each pay day, car account, holiday account etc and I am pretty good at not touching it. But with interest rates as low as they are at the minute, that is not a particularly good strategy, as they earn virtually no interest.
For example, I realised a few months ago, that I had a savings account (Car Fund) with £7,000 in it, carefully built up at £200 a month over several years. The interest some months ago was £3.14 a month. In December this dropped to £0.02. The rate of interest paid by RBS across all of its accounts is now a measly 0.01%.
So, given we have no need to change our car in the short term, I moved £7,000 from the savings account into my Stocks & Shares ISA, where even since 8 December, it has earned about £166 growth. Our other main savings accounts are held in Nationwide, and they have also been reduced. One has gone down to 0.25%, the other down to 0.1%.
So why a budget?
If I look seriously about what our expected spend is over the next year, I will be able to estimate what cash in hand I need to keep ‘ready’. Not really an emergency fund, just what will be needed over day to day living costs. I will also be able to keep a tighter handle on ‘money drift’ and generally improve my planning, by grouping our savings into amounts that we can invest
So, for instance, as mentioned above, I don’t intend changing cars this year, so why have money sitting aside in a savings account, not earning any interest? The only worry is that if I put money into an ISA, it will go against the grain to take it out again, so I need to look at where and how our short term savings will be invested.
Step 1 – Set A Budget
Based on last years spend, and estimated for this year. No big purchases are allowed for. I hope not to have an expensive year for either the house or the car. As the vast majority of our January holiday was paid for last year, it effectively doesn’t come into this year, except for a small amount on one of the credit cards. Everything over and above this will be saved / invested.
Step 2 – More Research
I need to work out where the best interest accounts are in the UK. Then I can put any money that will be needed this year into that. I can always use a credit card, to give me a few weeks breathing space, if I need to lift investments. (My credit cards are paid in full each month automatically.)
Any money currently sitting in savings account earning little interest, that will not be needed this year will be transferred into investments. We have enough room in our budget that we should be able to fund unexpected items such as a new washing machine without lifting money.
Step 3 – Review savings approach for the entire year
We put the majority of my husband’s salary straight into a pension pot. I am also allowed to put £3,600 into a pension. Depending on my outcome on my state pension (see my earlier post here), I may wish to pay £750 Class 3 National Insurance contributions which will increase my state pension by £4.40 a week. Using the budget, I should be able to put more away each month into investments, rather than doing it once or twice a year.
Step 4 – Keeping a track of our outgoings
This will be the hardest part. Part of keeping a budget means tracking it. Anything that goes on a card can be checked off. However, I like using cash, because this means I watch what I spend. Who wants to be that person at the check out, who hasn’t got quite enough to pay for everything in their basket?? So I will need to be better at keeping receipts, and logging them.