A couple of months ago I was interviewed by a fellow Blogger TheFIREstarter. He asked me about my motivations to become Financially Independent, why I was Blogging, my interests, general advice etc. (The Full Interview can be found here if you're interested).
He asked me what my number one money saving tip was. Great question, but for me this was an easy answer.
"Track ALL Income and ALL Expenses. Every little penny for at least an entire year."
My decision was based on the dramatic improvement I found from implementing it. I believe this is the foundation for someone looking to improve their finances. It's amazing how many people don't know how much money they earn, spend and save/invest each month. I'm not judging, as I was one of them a few years ago.
I can't remember specifically when I started using a Budget Planner, but it was around 4 years ago. I stumbled across an example on Martin Lewis' website Here. Martin explained that most people use budgets that don't work as people don't put EVERYTHING into consideration. They forget about the minimal daily spends like coffee or sweets and the big annual, one offs spends like Christmas and Car Insurance. When you record every penny you spend and earn over the course of a year, you're able to establish if you're spending more than you earn. If you spend more than you earn, then long term saving & investing will be very difficult if not impossible. This concept isn't new, Dickens' Mr Micawber laid out the principle concisely back in the 19th Century:
"Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds six, result misery."
I was really interested to find out which position I was going to be in, happiness or misery. I used the Budget Planner on the website, and I was relieved to find out that I had just over £20 spare at the end of each month. That relief quickly changed into determination to improve the monthly excess figure I had. How much money could I create for myself each month? I started to work through all of my spends systematically to see if I could reduce costs, and within a few months that monthly figure rose to over £300 a month. Now that's more like it! I could finally start to make some real savings.
It was at this point I started to learn about savings and investments, I wanted to work towards owning a Buy-to-Let Property, and have a pot of cash for savings. Once I had covered the cost of my bills from my monthly wage, I could focus on saving and invest what was left over towards these goals.
I work within a sales environment, so I have a different wage each month and I may also receive big one off bonuses for hitting annual targets so I wanted to make sure I could maximise my savings during these months. I also wanted to make sure that I could save and invest some money on my lower paying months which I've previously struggled to do.
It was time to create a Monthly Budget!
I did a bit of reading online on how other people budget their finances, I looked at several example Budget Planners and with a little bit of tweaking I had my very own Budget Planner.
Over the last 4 years or so I've been evolving my Budget Planner to suit my evolving saving and investment goals.
To use my Budget Planner, you will need to know what your regular monthly spends are, and how much that total comes to every month. This category includes the following for me - petrol, birthdays, mobile, mortgage/house bills (*I'll break this down further in a moment), and grocery shopping.
You will also need to collate all of your annual one off spends. This category includes the following for me - Dentist, Christmas, Holiday, Oil, car tax, car insurance, and car maintenance. I add the annual total for all of these and then divide them by 12 to create a monthly total. I then save an amount slightly above this figure to cover myself. For example, this annual total comes to £1,695. The monthly figure is £141.25. I save £150 per month to ensure I have a little bit extra just in case. (The annual total was £2460 initially, and I was saving £205 per month!)
*I used this same approach for our mortgage/house bills account. For us, this includes - Water, TV license, council tax, telephone, broadband, mortgage, and electricity. The monthly total for this is currently £470 per month each.
Then I'm left with general Spending money. I call this my 'alcohol, drugs, and hooker' money. When everything else is covered, I can spend this on anything I want, guilt free. This amount has changed more than any other for me over the years. Initially, I set my 'saving rate' at 30%. After I had covered all the bills above, and saved 30% of my wage for investments, I would spend the rest! In some months this could be as high as £500+. I then capped this amount to £200 per month, then to £100 per month, and more recently to £50 per month.
My Monthly Budget
I use a spreadsheet which automatically calculates the amounts for me, but the calculations are pretty simple. I haven't attached the Budget Planner I use for a few reasons - I'm not 100% sure of how I can attach a Spreadsheet to a Post! The spreadsheet isn't particularly easy on the eye. There aren't many formulas, and the ones I use are basic. All in all, I'm confident most if not all of use can use my concepts and create a better one!
- I start by entering my monthly wage (after tax, national insurance, pension, student fees etc) into the spreadsheet. My saving/spending will be calculated after entering this amount.
- Deductions (Bills) - I remove the amount I need to cover 'Regular Monthly Spends', and 'Annual One-off Spends'. My Regular Monthly Spends are currently £555 per month, my Annual One-off Spends are £150 per month (£705 total). £670 of the £705 total is fixed each month (mortgage/house bills), and £35 fluctuates month to month (birthdays, mobile bill). Most of the deductions in this section are set up as a direct debit or standing order so I don't need to do anything. I just ensure the money is in my current account and it comes out automatically. My Annual One-off Spend (£150) is transferred into an easy access savings account at the start of every month. I can withdraw the money to pay for bills as and when I need it. It's not nice taking a chuck of money out of your wage to cover bills, but trust me there is nothing more satisfying when you have a big bill to cover, and you simply withdraw the amount from this account! Psychologically, you get used to this process very quickly.
- Deductions (Fixed Saving/Investing) - I then factor in the amount I need for my Saving/Investing which have been set up on Direct Debits. I currently have 2. £50 per month for a 'UK FTSE All share Index tracker', and £300 per month for a 'Fixed Income Regular Saver'. The Index tracker was my very first investment, and I want to continue with it for the time being. It's always been in profit for me which has gradually increased over time, and I believe in not changing a winning formula. The Regular Saver guarantees 5% income on it's 12 month anniversary, so it will give me a nice lump sum to use in January 2015, which I plan in reinvesting in shares when it matures. (£350 total).
- Spending ('Alcohol, drugs, & hooker' money) - Take away the amount you want to allow yourself to do guilt free spending each month. I have a separate spending account, which I transfer this money to at the start of every month. As I mentioned above this used to be quite high for me and I'm now happy with just £50 per month. My suggestion would be to try limiting yourself for 1 month and see how you get on, you'll be surprised when you have a figure to keep within how easy it is. It's also nice to know this amount can be adjusted at anytime. For most people this category has the most potential to be improved.
- Saving / Investing - Once all of the above has been covered, I'm left with a figure to save/invest with. For me this figure fluctuates a lot, it can be as low as £400 and up to £1,300. You can change around numbers 4 and 5 if you wish and fix an amount for saving and spend the rest, but my priority is becoming FI, and to do this I have to set Saving/Investing as left over money as it's the larger of the two. You can break this money down to suit your saving/investment goals too. I used to split the money 50:50 with my Buy-to-Let property (savings account), and money for investing in stocks and shares for which I had two separate savings accounts for each which I could track independently. I now put 100% of it in the Investment savings account, until which time I have enough to purchase shares.
This is the basic set up for my Budget Planner. This should get you started if you currently don't have anything in place. I take it a step further though and you're welcome to join me if you wish....
At the end of every month (just prior to pay day, when all bills have been paid) I review the left over money in my Current Account (number 2 above). There are some fluctuations which result in me having left over money. I choose to put 100% of this money into my Investment savings account to use the following month. I used to put 50% of it into my Saving accounts and 50% into my Spending account.
I have the same situation with 'drugs, alcohol and hooker' money (number 4 above). I regularly end up with money here at the end of the month. I've tried a couple of different things with this left over money which I'll share. I used to just leave it there, so I had a bigger amount the following month, I found I would would end up LOOKING for things to buy and use the money up. I wouldn't recommend this approach! I then opened up a Spending Savings Account. Any money that I didn't spend would be banked in the saving account (earning interest) until a big spend would come up and I could use it or if I had my eye on something worth £500, I would save into this account until I had the amount, then I could go any buy it guilt free. I like this approach and would recommend it. I then got 'addicted' to saving money to invest, so I kept the Spending Saving account, but instead of putting ALL of the left over money in it, I would put 50% of it in there, and then 50% of it in the Investment Saver. This has recently changed again, and I now put 100% of the left overs in my Investment Saver. There are a lot of options to choose from, and you can tailor it to meet your needs and goals.
The last point I want to cover is 'Windfalls' or one off incomes like Birthdays, Ebay money, Gambling winnings or selling a car etc. I use my spreadsheet to separate money for me on these occasions. For my Birthday for example, I would put 50% of it into my Spending Saver, and 50% into my Investment Saver.
For the car sale, I put 100% of it towards my investments, as that was my priority and I didn't want to buy anything else at the time.
For Ebay and P2P lending, I take the amount after fees, postage and packaging etc, and put it all into my Investment account.
For Gambling winnings, I'll spread it out a little more...... maybe 50% spending, 50% investing.
You don't have to do any of this, but it works for me. Similarly to making a menu list for the month ahead, it takes the thinking and emotion out of it. I get to spend a bit and I get to save to bit depending on where it comes from. I don't feel like I'm cheating myself or being too frivolous with it, I've found a balance I'm happy with. That % will change from person to person, and only you need to be happy with it. I'm constantly tinkering with these amounts too depending on my goals and needs at the time.
I hope you've found this Post useful. I'd love to hear what you think of my planner, so please let me know! If you end up using it or something similar, please let me know how you get on. If you have any ideas on how I could expand it or what you do differently with your planner, I'd also love to hear about that too.
Thanks again for reading!
Labels: Income & Expenses, Strategy