New Year 4: You need (some sort of) budget

Well yeah it’s February but there are still 11 months left of the year, so don’t worry if your New Year’s resolutions are taking a while to kick off. As with everything to do with changing habits and mindsets – or indeed with personal finance – takes time.

In my previous posts, I promised to come back to the concept of budgeting. Lots of people start here but whilst I agree it is super important to know where your money is going and how to spend more mindfully, starting with the budget always makes me feel like it’s putting the least interesting bit first and there’s a risk you will get put off before you get to the thrill of setting yourself up for your dreams. That doesn’t work for everyone though, so do things in the other that you find the most inspiring.

You need to get excited, and to put your foundations in place: do whichever most turns you on first. Photo by Silas Baisch on Unsplash

There are equally a ton of different ways to create a budget and it depends on where you are with your finances.

Zero-Based Budgets

Best for: people with limited incomes, or challenges with spending habits

The idea here is to give every single penny of your income a job – to allocate it an ensure that it doens’t wander off by itself. It’s a monthly budget based on an assessment of all your fixed costs, then where you allocate funds to discretionary spending and to savings. Once this is done, all you have to do is track your spending and basically stop if you are about to go over any of your planned limits.

There is lots of information on estabishing a zero-based budget but all you really need to know is a detailed list of your income and usual expenses:

  • Fixed costs – the basics to keep the wheels on your life;
  • Discretionary costs – including groceries since how much we spend on this can vary so widely, along with things like clothes, cosmetics, entertainment etc;
  • Irregular costs – these could be either fixed, like a car service or discretionary, like an annual subscription, but you need to be able to plan for them (or choose to cut them out) or they will mess up your monthly plan.

Once you have done an audit of all of these costs and listed them out, take a really good look. Are you being realistic? Over-ambitious in terms of cutting costs, or too lenient? If you are at the point of making a budget it’s because you want something more important so focus on that instead of on feeling like you’re cutting all the treats out of your life. Building your future is literally the best treat you could have.

Budgeting is just organising what you have so it gets spent in the ways you intend. Photo by Andreas Näslund on Unsplash

50/30/20 Budget

Good for: people who want a framework then a bit more freedom, but are still getting started on a financial independence journey.

This is pretty similar to what I do, thought with the cost of childcare it’s more like 65/15/20. It’s a pretty simple way of guiding your money rather than tethering it down, which is why it is easier to do if you have some slack in your budget and aren’t troubled by impulse spending.

You set out your expenses into buckets: 50% for needs, 30% for wants, and 20% for savings. You will need to know your fixed costs, then be prepared to budget down on your needs so that they fit within your budget envelope. It’s a really good way to get started in terms of savings – or paying down debt – and trimming your budget in a way which helps you to build good habits. You will still need to roughly track what is going to each bucket during the month so that you can make sure that the ‘wants’ 30% isn’t going off track but you can also be secure in the knowlegde that you have covered all your bases, and you are living within your means.

Extreme Budgeting

Best for: those who are really driven by their goals and have flexibility. Or who love budgeting.

This seems to be a pretty common story in the FIRE movement, but it’s not something which has ever really worked for me. I could argue this is because of lack of flexibility though these are linked partly to my status as a single parent and partly to other choices, like staying in a career which prevents geo-arbitrage.

This is a huge leap from either of the other two, which are more focused on the basics of mindful money. Extreme budgeting can be done in fact with either a zero-based budget, or using different percentages with the same 50/30/20 approach but the focus is on drastically reducing spending. Here you would audit your spending then really interrogate it. What can ou cut back on? What would that mean for your life – moving house, selling your car, cleaning your own house? I like the focus on a Marie Kondo-esque focus on what brings you joy and cutting it out. There is often a focus on discretionary spending, but this can also be applied to your fixed costs – maybe that big house isn’t bringing you what you thought it would, and you can consider downsizing for example. As with all budgets, it’s totally personal, so for me one latte a week brings me joy so I buy one on Sundays whilst my daughter is at ballet class and really savour it: buying another one at any time feels like a waste of money rather than a treat, so I just don’t do it.

There are brilliant resources from people who live this way and have done brilliantly on their FIRE journeys. Try the Frugalwoods blog or book (which I love though the couples element personally puts me off a little) or try Michelle McGagh’s No Spend Year for a detailed and inspiring journey from the UK.

Find the joy in everything, even budgeting – you are owning your future. Photo by Taylor Heery on Unsplash

There are a lot of different options and you might need to try a few, or move on from one to another. The main thing is to get started: to be mindful with your money you need to know what you want it to do, and then intentionally guide where it is going. There is always going to be an element of tracking as well, especially at the start, and I will talk about tools for that too in future posts. Budgeting can feel like a tricky process to get started with, but it is putting you in control, and that’s a great feeling.

How do you do your budget and what tips do you have? I’d love to hear from you!

New Year 2: Auditing your fixed costs

First of all, in line with ‘new year, new challenges’ I am thrilled to let you know that I have set up an Instagram account, @brilliant_ladies_money linked to this blog. Do join me for daily tips, hacks and inspiration on mindful living and growing into your financial power – plus I’d love to see what you are working on!

Last week I wrote about giving yourself a break: this week, it’s more about knuckling down and finding ways to do some of the foundational tasks on which you can build out your financial independence journey.

Whilst most people think about going straight to budgeting, my feeling is that can seem like a huge mountain of joylessness. and sometimes that is offset by knowing how great you will feel afterwards but – a mountain is a mountain, you know? So I recommend splitting this out and focusing first of all on an audit of your fixed costs.

Maybe boring but necessary – find that paperwork! Photo by Kelly Sikkema on Unsplash

Undertaking an audit of your finances literally just means going through the details of your spending and working out what your outgoings are, and how often they are paid. I am not talking about discretionary spending at this point – that will be what you have left over once you have done steps one and two. And you don’t need to include things which go out of your pre-tax salary like pension contributions or healthcare since all we are doing is balancing your take-homie budget. There are tons of different ways to do these things, and they key is trying something and sticking to it long enough to see if it works for you.

So, what are all the things that you have to pay regularly, whether monthly or annually? We’ll talk about ways to plan for the non-monthly outoings but for now, just make sure they are in here.

  1. Think about your fixed costs and what they might be – housing, transport and childcare are usually the three biggest. Think about your utilities, council taxes, car service or tax, income tax if you are self-employed or have side hustles and so on. It would also include debt repayments if you have them. How to fast track debt repayments is a different discussion: for now just list them out.  The list doesn’t include regular payments which you could choose to live without, like media subscriptions: only the essentials.
  2. Go through your direct debits and standing orders first, listing out the detailed amount, what it’s for, and when it goes out of your account into a spreadsheet or notebooks. You can write this down however you like but it’s easier to use a spreadsheet because then you can change figures and it makes it easier to track your overall spending over time.
  3. Go through your bank statements and identify other areas where you might have other regular costs. I pay our public transport passes via a recurring card payment so they only show up on my statements. Add these into the spreadsheet. You might need to scour a full year of statements, but if you have in mind when your fixed costs come out you can be a bit more focused.
It can even be beautiful before you start the climb, but the view is much better from the top. Photo by Kyle Johnson on Unsplash

This is what my real numbers look like. And I know the actual amounts are OUTRAGEOUS but I live in Denmark – which also explains the salary – so it’s also pretty standard. I will chat another time on the sky-rocketing utility bills happening all over Europe (when I can find the time in between putting extra jumpers on), but for now, this is what I expect to have as monthly fixed outgoings in 2022:

Personal insurance £               11.48
Home insurance £               38.33
Car insurance £               54.91
Buildings insurance £               88.29
Insurance Totals £         193.01
Electricity £             147.62
Internet £               35.70
Water  £             209.72
Gas & hot water £             494.13
Security (offset by cheaper insurance) £               32.94
Council tax £             302.59
Utilities Totals £      1,222.70
DK Loan £             788.22
Mortgage £         1,045.30
Deposit Loan (more on this later…) £             498.00
House Repayment £      2,331.52
Train passes £             100.00
Car service and tax £               25.00
Transport Totals £         125.00
 Childcare Totals£      1,089.45 
 MONTHLY FIXED TOTALS£      4,961.68 

Remember that this is your life, and your money. Some people see childcare as negotiable and might look at this and see how to rebalance their priorities with their spouse. That is not my life, so this stays as a fixed cost. Ditto transport – whilst people can change how they approach transport, I don’t plan to do so this year so it’s going to stay fixed.

And that’s it! Everything else you spend is discretionary. And yes there are other things you need to stay alive like food, but we’ll deal with the monster topic that is grocery shopping in part three.

Once you know what your fixed costs, are, take your income, and minus these costs. Then you have the money you have left over to save and to spend. For me that’s £7,500 as monthly take home meaning I have £2,538 left. That means my fixed costs are already 65% of my monthly income.

Next week we’re going to work on what this means for saving, spending, and making it all come together for the changes you want to see in your life.

It will make everything so much simpler for the next step. Photo by Pablo Arroyo on Unsplash

Let me know if you undertake this process and how it works for you. And here’s looking forward to a fabulous 2022!