Part 2

In Part 1 we looked at the foundations of your personal finances – the thoughts and habits which are essential for making positive changes to your bank balance and your life. If you haven’t seen that yet, take five minutes out and read it here.

Ready to take the first major step towards improving your finances? The most important thing you can do is to set a realistic and achievable budget. It needs to cover your essential outgoings, steadily pay off any debts you have, allow you to work towards your goals, and leave breathing space for emergencies. A lot to ask, right? Not really! With the right tools, it absolutely can be done. You’ll need to think flexibly and remember that although change might feel uncomfortable, it often leads to discovering new skills and interests.

For some people, it’s less about compromising on treats and spending habits, and more about taking a good look at where their income is really being spent. People often have a lot more disposable income that they realize – it’s just a case of managing it properly.

Which boat are you in? Maybe your bills are high and your income is tight, or maybe you’ve simply lost track of what’s happening with your finances. Or you may have a foot in each boat and feel like you’re about to faceplant in the water! Whichever it is, grab a pen and open up a notebook or Word document – you’re about to start steering that boat in the direction you want it to go…

1. How Much?!

This is where you log into your bank account and review the regularly scheduled payments coming out. Write each one down, with the date it’s due on (this may vary slightly, depending on Bank Holidays and weekends). This list will probably include rent or mortgage payments, loan or credit card repayments, gym or club memberships, phone and cable TV bills, and maybe some things you’d forgotten you’d signed up to. (I had a moment of true irony when I realized I’d forgotten all about signing up to a mindfulness blog – six months’ worth of unused $7.99/month membership fees taught me way more about mindfulness than the course did!)

These payments are probably the same amount each time, but make a note of any fluctuations you see.

If you’re paid monthly, there probably won’t be any adjustments to make as these types of payments are generally monthly ones.

If your wages are weekly, you’ll need to perform this calculation for each monthly payment:

Payment X 12 = yearly figure

Yearly figure / 52 = weekly figure

This is how how much of your wages need to be set aside each week/month for that payment.

2. Bills, Bills, Bills…

Now, make a list of all the payments which aren’t automatically scheduled – for instance, do you regularly put money into a gas or electricity meter, or do you receive quarterly bills for utilities? You’re going to need to dig out all of your bills for the past year, so put the kettle on (and maybe get some cookies – this will take a while!)

When you have a comprehensive list of everything you get billed for regularly, grab a calculator and work out the monthly or weekly average for each payment. If you’re paid monthly, go with monthly – and if you’re paid weekly, well, you get the idea! You need to know how your wages relate to your outgoings, so adjust your calculations to suit your pay schedule.

Let’s use your electric bills as an example:

• Say you pay them quarterly, add together the most recent four bills to get a full year’s figure.
• If you discover you’re paying $1300 a year for electricity, divide this by 12 or by 52 to get a monthly ($108.33) or weekly ($25) figure. This is how much you need to set aside each time you’re paid, to be sure of having the funds ready for the next bill. There will be seasonal fluctuations for some bills – e.g. an increase for heating in winter – but if you put the same amount aside each pay period, eventually you’ll build up a reserve over the cheaper months which will cover you in the winter.

It gets a little trickier if you use a meter. If you’ve kept your receipts or you generally put the same amount into the meter each week/month, then you can work out the averages just the same as above. If you just put money into it whenever it runs out, you’re going to need to track your spending for a few months. Don’t panic if this is you – just put down your best guesstimate for now and adjust it later, based on the costs you’ve tracked.

3. What About Everything Else?

You should now have a list which includes weekly or monthly figures for your major payments and bills. It will be a mixture of regular payments (e.g. $840 rent scheduled on the 1^st of each month) and utility or other bills in your name (e.g. $108.33 which needs to be set aside each month for electric).

But what about the rest – food, transport, clothes, etc?

My first attempt at drafting a budget failed miserably because I just made this part up! I thought $50 a week would be fine for a food allowance and I decided I didn’t need any new clothes for a good while, so I left that bit out. Haircuts? Nope – they weren’t ‘essential’ and they were just messing up my figures. I made a rough guess at my transport costs and stuck a figure in which turned out to be about two thirds of the actual costs.

This is why your budget has to be realistic. It’s got to be achievable in real life, not just look good on paper. Before you can work out what you want to spend on each area, work out what you’re currently spending now. If you keep grocery receipts, go grab a pile of them. (You’re probably sat in a nest of paperwork now – I promise it’ll be worth it when this is done!) Just like with the metered payments, if you really have no idea and no records of what you’ve been spending, just take a cautious guess for now and then start writing down everything you spend on food, transport, and other daily expenses.

You’ll be adjusting bits of this for a few weeks once you’re recording what you spend, but you should now have a comprehensive list of your regular outgoings. Don’t forget to adjust everything to suit your wage patterns!

4. Quick Checklist (You’ve Got It Covered!)

Does your list include the following items, if relevant?

Rent/Mortgage

Utilities, including mobile phone

Loan and/or credit card repayments

Groceries (including take-out)

Household supplies and toiletries

Transport – car or public

Education costs – e.g. course fees or equipment

Childcare

Entertainment – e.g. cinema, theater, meals/nights out, hobbies, etc

Clothes

Haircuts and beauty treatments

Health items – Glasses, contact lenses, dentist, medicines, vitamins and supplements etc

Gym/sports/fitness club membership

5. Back to Basics

Congratulations – you’ve just taken the first step to getting on top of your finances! You now have a good idea of what you’re currently spending each month, and the info you’ve gathered will get more and more accurate as you continue to track your spending.

So how do you set a budget from this info?

It’s time to decide what’s essential… and what can be cut out, cut back on, or swapped out for something less expensive.

There are some basic things which are essential to everyone:

• Food
• Accommodation
• Utilities
• Transport
• Medicines and healthcare products (if relevant)

You can’t cut them out, but you can shop around and cut back on costs.

For most people, transport is essential for getting to work and earning wages – so it’s simply a choice of whether running a car or using public transport is more cost-efficient and doable. For public transport, it’s often possible to buy travel cards to save on regular journeys.

Food is one area you can make huge savings on – I recommend finding a decent blog on frugal food shopping and see how much you can cut back on your weekly groceries while still eating well. (Here’s one to get you started: Outsmart your Supermarket)

If you Google ‘compare utility providers’ you’ll find a wealth of comparison sites which may help you scale back on bills.

Accommodation is trickier, but you always have a choice over how to spend your wages – get creative and be brave in your choices. If your dream needs $2,000 to fund it and you could save $200 a month by downsizing to a smaller rental, then it’s up to you to decide what’s more important. If it turns out that having a nice apartment is more important, then that’s fine! At least you know what your priorities are now.

Put a red dot next to each of the essential outgoings on your list, then read on for what to do with the rest.

6. Priorities and Motives

Add up your current list of outgoings to get a monthly or weekly figure, then compare this to your current income. If your outgoings are above your income, then you’ve got some decisions and big changes to make because your current lifestyle is unsustainable. Don’t panic – you’ve got this! The fact that you’re reading this shows that you’re committed to change. If your situation is worse than you realized, book an appointment with an advisor at your bank and see what can be done to help you get back on track.

If you can see lots of places to cut back, or your expected outgoings are already below your income, then it’s time to have another look at that piece of paper you wrote your main motivation on (see Part 1). How does your dream of starting a small business or travelling to Egypt stack up against the $32 you have left over each month? If your main motive is simply to pay off all your current debts so that you’ve got the headspace to think about what to do next, then look at how much you’re currently paying on your loan or credit cards – could you pay extra, if you cut back on something?

Start questioning everything without a red dot by it on your list. From new clothes to your gym membership, you need to decide how much of your wages you want to spend on this outgoing each month. Not using the gym very often? Ditch the membership and the side-helping of guilt that comes with it – maybe you’d be better off jogging or swimming. Or do you live close enough to work to cycle in once or twice a week (and save some more dollars into the bargain)?

For a lot of people, the money drains which are hardest to manage are the emotionally charged ones. That new suit or coat which wasn’t necessary but was on 40% discount and made you feel powerful when you tried it on in front of the store mirrors… That expensive bar which you always feel really relaxed in, so long as you don’t look at the bill too closely… The retail therapy you do on a Sunday morning with your partner, which is only pillows and plants so it counts as a household expense, right?

You know what your personal Kryptonite is. Whatever it is, it has the effect of bypassing your financial willpower circuits so quickly that you find your credit card in your hand before you can blink. This is why it’s so important to have that piece of paper with your primary motive written on it – and to read it every day.

7. Emergency!!

Here’s the real kicker – sometimes you have to spend your spare cash on other people’s priorities. You’ve been diligently putting money into a savings fund and you’re nearly up to $300 towards that plane ticket… and then your brother gets engaged and invites you to the wedding. How dare he?! It’s in Miami and you live in Maine… that’s the wrong plane ticket!

And what about emergencies or broken household items? The most infuriating incident I had along these lines was my freezer breaking down right after I’d stocked it with $100 of discount food – a double whammy of expense.

What can you do? Life gets in the way, sometimes. Major holidays, birthdays, weddings and other events all cost money for gifts, travel, and new clothes. None of us want to be left out of our friends’ celebrations and family occasions (well, maybe you could skip your second cousin Alex’s wedding to whatshisname you haven’t met yet…) and no one can avoid replacing broken phones, computers, cars, and roofs.

The solution is to create a fund for these things. Once you’ve got your bank balance in hand and it’s steadily going up each month (or at least not going down) then you can open a savings account and set up an automatic payment from your current account once a month – preferably just after your payday. Automating it is crucial: if you leave it up to you to put the cash in there each month, you’ll probably find yourself making excuses. ‘I’ll start next month’ was my personal favorite – I came out with it every time something seemed a better use of my money (which was pretty much every month!)

If you’re in a position to think about taking vacations, this is a good place to save for those too. Ideally, you’d put at least $50 a month into this fund – but it’s your budget, so choose an amount that suits you and stick to it.

8. Stickability

We’ve talked a lot about the psychological aspects of sticking to a budget, but what about the practical ones? You’re busy and you don’t have time to worry about every last cent being in the right place. One of the main reasons people fail at budgeting is that it can get too complicated and time consuming.

Here are my top tips for keeping it as simple and automated as possible:

• Separate accounts: Most banks let you set up savings accounts quickly and easily just by logging in to your main account. I use mine as funds for various things. Alongside the emergency/holiday fund, I have one for all the regular and irregular bills which don’t come out of my main account automatically. This keeps those funds separate, so I never have the problem of checking my balance and thinking, ‘woohoo! I have X amount of cash leftover this month, so I’ll treat myself to a meal out!’ …only to remember three days later it was supposed to be for the gas bill.
• Cash, not card: I have a weekly budget for groceries, which I take out in cash every Thursday. The day has no special meaning – I just started on a Thursday, so I stuck with it. This works because I have a visible amount of cash that dwindles through the week. By Wednesday, if I’ve only got $6 left then I know dinner’s going to be beans on toast! You can use this for nights out (ATMs are lethal after several cocktails!), for shopping trips where you have a set budget, or for anything which involves handing over money in a store. Leave the card at home if you don’t trust yourself. You’ll feel naked, but your bank balance will thank you!
• Weekly and monthly check-ins: Use your journal, or a spreadsheet, or a Word doc, or an old college textbook… anything you can return to regularly to keep a track of your progress. I make a note of my bank balance on the first day of each month, to make sure my budget’s working. In between, I write quick notes on things I need to remember – like ‘spent $70 on groceries this week to stock up on store-cupboard bargains; take $20 less out next week’.

Most of the time, I don’t have to think about my bank balance. You’re getting all the groundwork laid now and it takes time, but it’ll soon become automatic. You’ll trust your figures and trust your judgment, knowing when to be flexible with your budget and when to stick firmly to it.

9. Homework

Want to be top of the class? These resources will help you fast-track your financial progress.

I love being old-school with my budget and simply writing it down (in a Word doc, not with a quill and ink – I’m not that old-school!) Personally, I think it’s the best and simplest way to get started. But there are some incredible apps out there to help you keep track of your income and expenditures – they’ll prompt you for relevant info and perform calculations for you. Try these ones out for size:

• everydollar.com/app/budget
• Calendar Budget (Subscription Required)

Looking for a full introduction to managing your personal finances? Here are two free courses:

• https://www.futurelearn.com/courses/managing-my-money
• https://www.udemy.com/personal-finance-101/

Whatever stage you’re at, I’ll say it again: You’ve got this! Work through the steps one at a time and remember why you’re doing this.

…and if you want to start thinking beyond cutting expenses, and consider how to bulk up your income, go to Part 3!