Firstly – huge thanks to everyone who has joined me on @brilliant_ladies_money over on Instagram. It has been eye opening for me to post every day over there, and really inspired me to connect with the FIRE community in another way.
Secondly – I know we are getting close to the point where you have to stop saying ‘happy new year!’ January has been smoke this year and it’s almost done. But I wanted to carry on with the series about planning for your money, and to talk about the step after you work out your basic outgoings.
Last week I shared how to audit your fixed costs: all the money that you know for sure has to be made and spent to keep the wheels on. This week I want to introduce the idea of paying yourself first. Basically, this means mentally going straight from fixed costs to your saving goals, instead of going to work on your discretionary spending budget.
There are a couple of caveats with this. If you are living on the breadline or only just making ends meet each month, then this method is not likely to suit you. I really want to recognise that so many people are struggling in these hard times: the impact of prices hike in the UK where the rising cost of living is now a crisis for people who are at the ‘normal’ end of the income spectrum is shocking. I will reflect on this – and how to cope – in future posts, but for now I just wanted to recognise what is going on in the world. Secondly, if you have struggled with controlling your spending in the past, you might be better off working to a zero-based budget to tighten the reins. Again I will talk to this in future posts, but for now I wanted to reflect on how I am planning my own money for 2022.
Working out how to ‘pay yourself first’
You know when you get paid, all those good intentions about saving or paying off extra debt seem to get pushed to one side? Bills get paid, the monthly take away gets bought, and then things just sort of slide. And this happens over and over again, even when people’s incomes increase.
This is often down to two things: hedonic adaptation, and Parkinson’s Law. Together these basically mean that as you make more money, your perceived needs and wants expand; and if you have money to spend, your needs will expand to spend it. The only way to overcome this is to be mindful with both your money, and your wants and needs and plan accordingly.
Set your self payment plan
Once you have worked out your fixed costs as a percentage of your take home pay, you then know what you have left to play with. In my case I spend 65% of my income on the fixed basics, leaving 35% for everything else – whether that’s groceries, holidays, or savings.
For the last few years, I have been trying to save 30% of my income. Since I pay a healthy amount into my pension pre-tax – the equivalent of 15% of my post-tax income – this has been easy to surpass. But in 2022 I want to consciously try and save 20% of my take home pay. Realistically this will mean cutting back in terms of spending. But for me the mental exercise of setting saving goals and sticking to them is more doable and inspiring than setting a tight budget and then saving what is left. They amount to the same thing, so it will depend on what turns you on as to which is useful.
Saving 20% as standard
I calculated that I have £7,500 as monthly take home with £2,538 left after fixed costs. This means I should be saving £1,500 per month. Currently I do the following:
|SIPP personal pension||£ 300.00|
|ISA savings||£ 500.00|
|Children’s’ ISA||£ 200.00|
|Children’s’ Junior Pensions||£ 50.00|
|Emergency fund top up||£ 100.00|
I also overpay my mortgage by £500.00 a month which goes mostly to capital so I count that in my mind when I think about savings.
So with a total of £1,650 I am at my 20%. I am fine with keeping to that amount but I will review whether I should be paying off my mortgage or focusing my savings in a different way this year. I will talk more in future about options for savings and investing, and how to make those precious parts of your income work for you.
Next week I will talk about the spending part, and ways to look at how to best use the rest of my income. There are lots of ways to do this which facilitate planning for bigger or less regular costs like holidays or repairs. But once my savings goals are set, I feel much more in control.
Let me know how your financial planning is going! And good luck with this exercise, I hope you found it useful.