People often ask me how I budget.
Fair game; I am in personal finance and I have a personal finance blog on which I’ve written a fair bit about successful budgeting.
I’ll be completely open with you:
Most of the time my budgeting system looks exactly like the picture above.
Heck; this is a picture of the first stage of my budgeting system that involves putting all receipts in a folder for a month and creating, what looks like, a mighty mess.
I’d even go a step further and tell you that for the first six months or so my budgeting really sucked. Do you know why? It sucked because it didn’t simply start with a mess of receipts and a record of spending; it ended with it.
Things have changed since that time of chaos, missed targets, broken promises and debt. My budgeting system has become a finely tunes instrument making then sounds of perfect money management music.
There are three things I figured out to move from the chaos of receipts to a system that helps me know where our money comes from, where it goes and how to optimise the flows up to the nearest £30.
#1. There are three stages of successful budgeting;
#2. You need the tools to make decisions about your spending, earning and balances; and
#3. Successful budgeting is not about money; it is about the life you live and the life you want.
Today, I’ll tell you about these and I’ll try to keep it straight forward. You really don’t need complexity at this stage. One thing I’d ask though is that you don’t read this post as you’d read a novel: please read it as if you are revising for a test. This means you need a piece of paper, a pen and downloads of the tools I’d be mentioning.
Oh, my successful budgeting also means that I work with proper numbers (which is very good for a woman who comes from a country where people still measure distance by the number of cigarettes you could smoke while getting there).
In our family it is John who says things like ‘yes, it will cost us several hundreds’. If you are like John please stop reading this post now. Go away and learn something about numbers and how to use them; apply this knowledge to your money. Are you ready? Now you can continue reading what I have to tell you about successful budgeting.
All that I’m telling you here was worked out through trial, failure and persistence. My first budget was a failure of major proportions: it not only made me feel like my life has been bundled into a straitjacket but also took me halfway to giving up the whole budgeting and getting out of debt lark. (I’m very happy I didn’t give up but it was very tempting at first.)
Here are the three stages of budgeting and the tools and approaches you’d need to implement them.
Stage One of Successful Budgeting: Get to Know Your Money
This stage of successful budgeting is about describing your money. This means that you need to gain detailed knowledge of what you earn, what you spend and what you spend your money on. Sounds banal and boring – and to a degree it is – but without doing that any attempt to budget becomes akin to writing fiction for delusional adults.
Okay, let me ask you a question: do you know exactly how much money you make per month?
You do? Great. Because you won’t believe this but many people think that they know when they underestimate their monthly (and yearly) income considerably. Sometimes people underestimate their income by as much as 10-15%. This is a lot, you know. If I were you, I’d check again; and I’d make sure that I include all my income while I’m at it.
Now, let’s move to something more advanced: do you know exactly how much you spend per month? Do you know what you spend your money on?
Ah, you are not so sure. You should be.
Using my system may help. It consists of three steps:
#1. Collect and keep all your receipts for several months
If in doubt, have a look at the picture above. Don’t panic though: you can stuff all these receipts in a bag somewhere and forget about them until you’ve been through, and completed, the next step on this list.
#2. Look at your bank statement for six months
Are you ready to give up? I know how you feel but please stick with me. This one sounds much worse than it is. Particularly if you have electronic banking (and I’m thinking that most people today bank electronically.)
If you don’t have electronic banking you should do. Go on your bank’s website and check it out. Once this is sorted you can continue working on the successful budget that will transform your finances.
If you already use electronic banking, I can tell you exactly what I did yesterday. Here it is:
- Went on the site with my current (checking) account;
- Downloaded the data of all transactions for the last six months;
- Saved the data as an Excel workbook;
- Saved all monthly expenses as separate sheets in the Workbook;
- Colour coded the main categories like utilities, mortgage, CCs, insurance, food etc.
- Went back to the ‘source’ spread-sheet and mad a note of all income streams.
This took me approximately an hour; and I kid you not.
#3. Use The Money Principle Monthly Budget Planner to record all you spend
Once I had all this data sorted out I entered the numbers in The Money Principle Monthly Budget Planner. (And a big thank you to the good people from Currys-PCWorld for helping making this look much more professional.)
Just as a reminder, TMP Monthly Budget Planner works by bundling up the expenses in three groups: fixed or the expenses that you have to pay and can’t negotiated easily; changeable or the spending that you can negotiate; and variable or the monthly spending that you can change very fast like spending on food, treats etc.
You can download TMP Monthly Budget Planner here.
Now you know your money and are ready to move to the next stage of successful budgeting.
Stage Two of Successful Budgeting: Make Hard Decisions about Your Money
Stage one of successful budgeting is very important but matters very little if you stop there. This was one of my failing when I started budgeting – I knew what we earn and what we spend and…nothing. We continued to earn and spend exactly what we did and the debt was piling up.
This changed when I started making hard but well informed decisions about spending our money. You see, most people would tell you that frugality is the way to go; test yourself and how much deprivation you can take before you fold it.
I don’t do frugality very well. There has always been a part of me believing that life is to be lived to the full and enjoyed. In fact, I believe that our life has one purpose: to leave the world a better place than we found it or, failing that, not to cause damage. Guess what? This is so much easier to achieve if you love your life.
This is why I had a problem when I started out. On the one hand, I had to find ways to reduce our spending and by a lot. On the other hand, I don’t do simple frugality and deprivation for me is as pointless as jumping bare-bottomed in a field of thorns.
Coming up with the ERR system for money management solved my problem; and it can solve your problem with making decisions about your spending as well.
What is the ERR system for money management?
You can read in detail what the ERR strategy is and how to use it to male your money go further here. As a brief reminder, the ERR strategy stands for:
- Eliminate (waste);
- Replace; and
- Reduce (consumption).
You remember the spread sheets that you ended up with at stage one of successful budgeting?
Now it is time to get back to them and look with the eyes of an ERR strategy master.
What are you wasting?
You may find that there are many different kinds of wistfulness in your budget (and your life). Look, for instance, at all your direct debits and standing orders: do you use what you are paying for? (A hint: if you are like most people around, you are paying for services you’ve long forgotten you have access to. Cancel the direct debit because this is waste.)
How much are you paying on insurance? Are you overpaying and under-insured? Are you over-insured? Do this right because it is a waste.
How much are you paying for food? Do you use all you pay for or you throw away most of it?
You already get the drift of how to tackle waste and what to look for. Let me tell you though that when I first did this exercise the waste ran into hundreds of pounds (in the higher hundreds to be more specific).
Next, look for items you can replace. These are usually items for which you are paying more than you should be; or things that you can still get but a lot cheaper. You may wish to have a look into the ways to become a frugal artist as well.
Last but not least, have a look at your spreadsheets with a view to reducing your consumption. Don’t tell me you don’t over-consume – we all do in capitalist societies. After all, we’ve been cast as consumers for well over half a century now and that is what we do – consume. Make sure you don’t consumer more than you feel comfortable with.
Stage Three of Successful Budgeting: Dream the Life You Want
When talking about budgeting most people will talk to you only about money. This is rubbish, friend. Your budget – as in the decisions you make about what you spend your money on – is not about money; it is about what you want your life to be.
In other words, the third stage of successful budgeting is about putting your money where your mouth is.
Are you dreaming of traveling the world?
Then you should probably stop spending your money on booze and cigarettes. (Not a joke at all. The money you’d spend on drink and smoke for a year will be more than enough for several months traveling around the world. Do the maths!)
It is up to you to decide what you really want in your life though; I can’t help you much there.
I can only urge you to do the dreaming exercise; you know, the one where you close your eyes and allow yourself to dream in great detail. You should do this while keeping out ‘the critic’ and ‘the accountant’. For more on how to use this technique you can read this.
Once you’ve worked out all things you want in your life, place them in three groups: a) things without which your life has no meaning; b) thing which you’d like to have in your life but can wait for; and c) thing that you’d like in your life but they are optional.
You know which list you should hold in hand when you go through your spreadsheets again, don’t you?
(Hint: make sure that all things that are at the top of the first list are still in your life. If your life will be meaningless without running interesting races, make sure that you travel around and race never mind how hard up for cash you may be. Cut out something else to make your budget work.)
Successful budgeting is no rocket science; it is simple. You have to make sure that you earn more than you spend at all times.
In this post, I tackled the spending part of this equation; will tell you about earning some other time. For now, it is important to remember that to budget like a boss you need to:
- Know your money;
- Know how to make decisions about your spending; and
- Know your life since this is what make budgeting make sense.