For me, budgeting has become a way of life and is one of the first steps to financial independence. If you're anything like how I used to be, you have a few days of feeling "rich" after payday. You walk past shops telling yourself "I could buy that if I wanted to, I've got the money in my account", only for all those direct debits to hit your bank account like little piranha's and then you spend the rest of the month avoiding your online banking app. Anyone who has seen the film Piranha 3D will understand the piranha reference.
Once I learned how to budget, I understood it was all about balance and having a plan for my money. I am a big believer in the saying "if you fail to plan, you plan to fail" and that is what I was doing every month. By not having a budget, I was setting myself up to fail each month and failing for me meant falling into debt even though I was earning good money at the time.
The first thing I needed to identify was my needs from my wants, and the way I did this was by splitting my outgoings into 3 "Buckets". The first bucket is for fixed costs. These are an essential living cost that you usually pay by direct debit or standing order like rent, internet, gas, electricity, water, council tax, mobile phone, car insurance etc.
The second bucket is for spending, you give yourself a spending allowance for the month, and that is for things like food, travel to work, petrol, eating out, clothes. You must set yourself a realistic budget; this is your choice, and if you put too much into this bucket, there will be nothing left for your third bucket.
The third bucket is for savings, and this is my favourite bucket. I love having savings; it feels so good to have money behind you that you can rely on if needed. I like to think of it as self-insurance, ordinary people call it an emergency fund.
A great tool to create and manage your buckets is the Money Dashboard App; they have added a new feature called "Spending Plan".
Using Money Dashboard’s Spending Plan
The "Spending Plan" works by connecting to your bank accounts and analysing it. It then follows a straightforward calculation:
Your account balances
Plus, your monthly income
Minus your regular payments (direct debits)
The calculation will then leave you with an amount of money you can spend. You can then allocate how you plan to spend your remaining cash. After you have planned your spending whatever is left, you can save.
Now I know a lot of personal finance experts will tell you to spend what is left after saving and I see a lot of my clients do this. I like to call it "The Rocky Balboa" because you have not budgeted your money for the month, so you spend the month fighting to survive each day (Round) without dipping into your savings account, and it's a miracle if you manage to win that fight.
I love Money Dashboard's approach of showing you how much you have leftover and saying, "now spend me" after all that is what you have been doing each month. However, psychologically I found myself going back to my spending plan and reducing my spending because I wanted to save more.
It makes budgeting your money simple with no spreadsheets or calculators needed. It stops you overspending, which in turn should stop you from falling into debt. Finally, it makes you accountable for how much time you want to take to reach your financial goals. If you're going to save £1,000 you can decide you save £100 a month and it will take you ten months, or you can decide to reduce your spending plan by £100 and save £200 and reach your target in 5 months. Neither way is right or wrong; it's all about having a plan and sticking to it.
My only regret is that I had to learn of this the hard way, and you get to avoid all my mistakes with a few simple clicks, Technology 1 – 0 Eman.
Emmanuel Asuquo is a qualified Financial Adviser and has worked in Financial Services for over 15 years. Emmanuel is privileged enough to give financial education talks all over the UK and has spoken to over 30,000 people in the last three years. Emmanuel has been featured in The Times, Telegraph, The Sun and Daily Mail newspapers and invited to speak as an expert guest on BBC Radio on multiple occasions. In November 2019 Emmanuel featured as one of four experts on the popular Channel 4 finance show “Save Well, Spend Better”. In June 2020 Emmanuel featured as an expert for the BBC One show “Your Money And Your Life”, helping a family save just under £10,000 on their annual household bills. In August 2020 Emmanuel was invited to be a financial expert on ITV’s “This Morning” putting him in the home of millions of viewers all over the UK. Emmanuel has a passion for helping people, and his vision is to become the financial adviser for the nation.
Emmanuel’s website: https://emmanuelasuquo.com/