I’m one of those people that likes things in life organised, logical and predictable. I’m not very good with surprises, especially when it comes to money.
Financially most people fall into 2 groups – those that budget and plan, and those that do not, and this can have a massive impact on both their cash flow throughout the year and their stress levels, depending on their income, spending and lifestyle. Even if you don’t have a specific budget for levels of spending each month, there are several simple strategies that you can use to help you get a better picture of what is going on with your money.
The chequebook method
Maybe I’m showing my age, but do you remember when you had a chequebook? Inside the front cover there was a space to keep a running balance for your account – which was really useful when spending was all done by cash, cheque and direct debit. Each time you got paid, or wrote a cheque / withdrew cash, you would adjust the total so that you knew how much money was left in your account.
This has been largely been superseded by mobile banking and apps on your phone, but the principle is still one of the easiest ways to be in control of your money and not over spend. When you get paid, deduct the full value of all of your direct debits (no matter when in the month they are paid) and the money over is the amount left to spend.
Do remember that out of this, as well as food, petrol, clothes and other monthly expenses, you should be putting money aside ( or leaving a cushion in your account) to allow for bigger purchases that you pay for once a year – car insurance, holidays, Christmas presents etc. Some people find it useful to transfer a fixed amount over to another account on payday to build up this ‘save to spend’ money, rather than getting to the end of the month and realising that they have spent it all on wine, clothes and other stuff.
The advantage of this method is that as you see your available balance decreasing (keep a record of how much is left in a notebook or on an app on your phone) you should adjust your spending habits accordingly – realising that you only have £35 left until payday, and knowing you need to put petrol in your car, should prevent you spending the money on a takeaway instead!
You do need to largely ignore the balance showing when you visit the cashpoint, or log on to the internet banking as this will show a figure higher than your true available balance as your direct debits may not have all come out of your account.
The all cash method
This works similar to the method above, except once you have allowed for your bills and direct debits to come out from the account, you withdraw the remainder from your account in cash either in one go, or weekly.
The advantage is that physically handing over money and seeing your purse get emptier can prevent you spending on stuff that you don’t really need. Plastic cards are a convenient way to purchase, but for a lot of people, they don’t feel like real money and it is too easy to ‘tap and go’ with contactless payments and lose track of how much you’re spending.
If you’re not comfortable carrying large amounts of cash, as you worry about losing it or having it stolen then a variation on this would be to transfer a fixed amount into a second current account which you use for everyday spending. This still keeps the money separate and when the account is empty you have to stop spending – do not have an overdraft on this account to prevent you spending money that you don’t have!
The envelope method
This is for people who like to have things compartmentalised and is ideal if you have specific things that you are saving for, or like to ensure that they don’t spend too much of their money on any one kind of spending.
Historically it would mean that when you got paid (in cash) you allocated money into various envelopes for utilities/travel/entertainment/holidays etc. in whichever proportion you wanted, so that you didn’t spend the kids dinner money on a new pair of shoes. For it to work, you need to be disciplined that you don’t borrow money from another envelope when the money run out – you need to make choices. You can only spend the money once, and if you need £60 for a meal out on your anniversary, you cannot spend all your ‘going out’ money on coffees and cakes throughout the month!
The other disadvantage, is that for longer term spending like holidays and Christmas, you could end up with a considerable sum of cash at home, which could get lost, stolen or dipped into, with the intention of paying it back before it is needed – which actually may not happen.
The best of both worlds?
The key thing is that for most people, they will spend up to their means, so if you have specific plans for some of your money you need to move it away from temptation to avoid getting to the end of the month to find that the money you were going to save has been spent.
This means taking the money out first. Set up a standing order for the day after payday to transfer the money to another account, once it is gone you won’t miss it. Self-employed people should do the same with their tax money, and their pension – have the payments set up to go automatically from your account – the same as if you were employed.
At this point you may also transfer money to other accounts depending on how many pots you wish separate your spending into. Most internet banking apps allow you to have more than one account, and this enable you to keep your spending separate, but all visible at a glance.
Personally, I use 6 accounts – 3 current accounts and 3 savings accounts as I use a system developed by Ann Wilson ‘the wealth chef’ which over the last 2 ½ years has revolutionised my attitude to spending and given me a great sense of calm and being in control of my money.
Part 2 will explain more how this works!