Modelling good money behaviour is key for our children’s development. We need to know where our money goes and make sure that it lines up with our values. Budgeting is not exactly the most interesting thing in life, but without it our money leaks away. In this blog we will look at how to do this – getting control over your day to day finances is key for your family’s financial future.
Last time we thought about our relationship with money. It’s fuel for the journey and is meant to be a facilitator not our master. Budgeting helps us identify and address our money leaks.
What goes in to a budget?
At one level it’s really rather simple. We have money coming in, and we have money going out. If you spend more than you have coming in, you will either have to draw on savings, or take on debt. If your money in tends to be more than your money out, that’s normally a good thing and you are starting to build wealth.
There are only two ways of affecting this part of our financial position. Increase your money in, or reduce your money out.
You’ve probably got a reasonable idea of where you stand, but probably not with 100% precision and there may well be a few surprises… Let’s start with our ‘money in’. For most people this is the easiest bit and it’s nice to have an ‘easy win’ early on. First, work out where your money is coming from, how much do you get, how often does it come in.
Technically you should work out what you can afford to spend (build a budget) before you spend the money. However for most of us we already have financial commitments and we can’t easily hit pause and start again. So we need to work out where our money is currently going before we can identify any changes.
Finding out where your money is going
You could go low tech and write down everything you spend in a notebook. It’s hard and you really do need to put it all down. Then you can go to town on it with colours to work our what’s happening.
You could use a spreadsheet, or online budget planner . You will probably want to download/print/gather your bank statements (and receipts for cash spending like coffee and haircuts). Work through the categories and you should get some insights.
If you are a bit of a geek like me you could use an app like Yolt or Money Dashboard (some banks have their own versions). Make sure that they are authorised/regulated by your local financial services regulator (in the UK this is the Financial Conduct Authority). These apps/websites connect to your bank/credit cards and help you categorise spending. Try a few and see what works best for you. They can identify spending habits and help you keep track. Some even help you find better deals.
What questions should you be asking?
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Having worked out what is happening with your money you should ask yourself some questions.
Money In Questions
- How long will you keep on receiving this? If it is going to stop, what’s your plan to replace it?
- How reliable is it? Do you need to have a fall back plan if you don’t receive this money? Should you be looking for a more stable source of income?
- Are there ways in which you can increase it?
- How does this impact your family?
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Could you do things differently and have a better family life?
Money Out Questions
- Do you use it?
- Who do you do it with?
- Is it worth it?
- Is it a good deal?
- Does it match up with your family priorities?
Some things are more important than others. We need to keep the lights on, put food on the table, and pay our bills.
Other things are less essential, but still important such as being able to get around. Not essential, but important are those things that ensure you are living, not just existing.
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As you go through your list think about the ‘wellbeing’ or happiness that you get from each thing. Incidentally, research has consistently shown that spending on experiences with other people provides much greater happiness than buying ‘stuff’.
What have you learned about your day to day finances?
First off. Do they look good? Are there any immediate areas of concern where your money is rushing away that you need to plug straight away? Are there any expensive debts that you should focus on paying down? Have you checked that you are getting the best deals/cashback for your utilities/services?
Warren Buffett is famously quoted as saying
“Do not save what is left after spending, but spend what is left after saving.”
Other people have described saving as “paying your future-self, first”. There will come a point when we have less (or no) money coming in, so we need to be putting money aside. Money is very easily spent, so we need to be deliberate in our saving.
Are there things you are paying for that you could switch into savings? When my wife and I reviewed our spending we found a few items that could be stopped because they weren’t important and didn’t provide us with wellbeing. We redirected these amounts to savings without affecting our current lifestyle. It will give us a better financial future.
Building a better future
Knowing what you are spending means that you can set a budget to identify and address overspends. It can help you stay in control of your finances and build a stronger financial future.
EQ Investors has built a free tool to help people understand their longer term financial position. Having been through the budget building process this might be a useful next step. Visit this website to find out more.