How to Manage Your Budget and Change Your Spending Habits

(The root of all our problems is avocado toast)

Before I start getting into this article, let me just say that I am not here to preach. As a millennial who does not own my own home, I often hear older generations blame our spending and lifestyle because we cannot purchase a house. Millennials or most people on medium to low incomes are not crap with money, buying avocado toast, fancy coffees, and coats for dogs. Me writing this article isn’t about this. I am not here to patronize you about how you spend your money.

I want you to get the best out of what you have.

And, honestly it’s nobody’s business what you spend your money on anyway. You could be super poor and have a fancy TV that you were given as a present — people are going to judge anyway.

I’ve mostly held my head above water with money, but I am a bit tired of feeling like this. I wanted to save, plan, and keep track of where my money was going instead of watching my cash dissolve in front of my eyes each month.

You might be at a point now where you can’t even see where your money is going — it’s there one day in your account and gone the next. You might ask yourself, “where has all my money disappeared to?”

Having a clear idea of where your money is going is essential to relieving that heavy everyday burden of upcoming bills. Freeing up cash plays a key role in beginning to grow your wealth, and seeing everything written down clearly in front of you, makes it easier to absorb.

Here are some of the habits that I implemented that have worked for me. I understand that this may not work for everyone and that people have different incomes, but some may help you as it has worked for me. Maybe some of this is common sense to you, but I literally had to retrain myself.

Sorting Out Your Budget

Creating a detailed and accurate budget makes life so much easier for you. You’re less likely to be surprised with unexpected bills, have your services cut off, or incur late fees and make your spending more efficient. It also allows you to assess whether you are spending too much in one area or paying for things you no longer use.

There are many options for detailing your budget. Just pick something that you are comfortable with. All that matters is that you don’t lose it and can clearly understand it when you read back over it later.

Firstly make a list of all your incomings and outgoings over a monthly period. This may sound obvious but listing things off and forcing yourself to think about it is the first step to managing your spending. If your income changes week by week, use an average over a year.

Next, you should do similar calculations with your outgoings. Use receipts and bank statements where possible to get the most accurate information about spending that is subject to change, such as grocery shopping and utility costs, which may be surprising when added up over a month. Your main outgoings will include utilities, groceries, insurance, car costs, loans, mortgages/rent, childcare, education, banking fees, clothing, and travel costs. However, there will be hidden costs such as birthdays, furniture, and take-outs requiring future inspection. Do not limit your list to essential things — include literally everything you can think of as accurately as possible.

After listing all the incomings and outgoings together and adding their figures, you hopefully should not end on a minus figure. Is there enough left to save some? If so, pick a percentage of your overall income, however modest, and straight away set up a regular automated transfer to a savings account on the same day, either weekly or monthly. Maintaining this account and assuring that you commit to saving this exact amount a month will kick off developing healthier habits early in the process.

Assessing Your Expenditure

Whether you have much leftover money or not, you should still aim to reduce your spending. Decide on what a reasonable weekly or monthly budget would look like for your household, even if it is less than what you are currently spending. Is there any way to reduce some of your outgoings and keep a bit of ‘wiggle-room’ in case something unexpected happens? Do you have too many bank accounts that incur several batches of fees a year? Could you reduce your grocery shopping by buying more own-brand products or discounted items? Could you walk or take the bus to work twice a week instead of the car, to reduce your travel costs? Could you reduce how many times a week you use your dryer? These are all questions that you can ask yourself to make little savings that will add up. Aim to shave a small percentage off your outgoings, even if it means using coupons in the supermarket each week, and add that to your savings.

As mentioned above, you should streamline the number of bank accounts that you have. For starters, you should only take out a certain amount of cash a month because not only is cash expensive to withdraw but because it disappears and is difficult to keep track of. Unless you are self-employed, you should keep it as simple as possible, with a maximum of two savings accounts. This gives you more control of your money and fewer fees and charges to pay. Many banks have the facility to set up separate digital wallets where you can have money deposited automatically from your main account without opening another account. Many banks allow you to label these wallets individually, which is helpful when it comes to identifying short, long, and medium terms savings objectives.

How to Create Reasonable Goals

An important part of growing your wealth comes from patience. “Rome was not built in a day,” as the saying goes, and honestly, neither will your empire. Starting small is the best way to maintain a regular saving routine. Enthusiasm can sometimes get the better of you at the beginning of your plan. You might end up overextending yourself, only to have to withdraw a large amount of their money to fix oversights. I have done this myself in the past and completely ruined the stable momentum of saving. This ruins newfound habits, and you can end up back at square one. Don’t rush into this. Just take it slow and wait. You’re in this for the long haul.

An initial safe goal, once all your bills are paid, and depending on your situation, is to put 10% of your income into your savings. This can be increased once you have made more cuts to expenses, but if you can aim to save at least 20% comfortably, you are doing well. Ensure it is comfortable. It is better to save less on a more regular basis than erratically in large lump sums or nothing at all.

The 50/30/20 Rule

When it comes to establishing how much to save, 50/30/20 is quite a useful rule of thumb. It covers the ratio of what your income should go towards. According to this rule:

50% should go towards essentials like rent, utilities, food, etc.

30% should be discretionary money for luxuries like holidays, take-outs, and activities, and

20% should be siphoned off towards savings.

This suggestion seems relatively easy to implement in a general sense. Still, it’s important to remember that everyone has a different situation.

For example, your mortgage or rent alone could absorb 40% of your overall income, leaving you with 25% left over after all your essentials are paid for. Even if there is very little room for saving, a modest 5% can still benefit you in the long run. You could also perhaps consider the possibility of reducing your living costs in some way, depending on your situation, by changing your grocery shopping or, if it is an option, living somewhere cheaper. On the other hand, you could have very low living expenses, totaling 20%, leaving you with 80% leftover to play with. Clearly, in this case, the higher the percentage you can save (at least 40%), the better.

Depending on your age and earnings, you will need to consider how much you need to set aside. The older you are, the more you will need to save in low-risk investments to combat inflation for your old age.

A Checklist of Organizing and Assessing Your Budget

● Make a detailed list of incomings and outgoings.

● Keep copies of your payslips, bills, receipts, and bank statements to calculate average income and expenses.

● Keep copies of all paperwork together and up-to-date.

● Simplify your banking to avoid extra fees.

● Check if you are due insurance and tax refunds.

● Set up a regular automated transfer to your savings account immediately.

● Shave a percentage off your expenditure if possible.

● Try, if possible, to apply the 50/30/20 ratio rule to your income.

● Be realistic in what you can save but commit 100% to it.

● Look at where you can make small savings initially.

● Examine where you spend the most of your money, even on essential items, and research if there is potential to change them.

Once you see that you can do these, you’ll hopefully feel motivated to see what you can do with this extra money — but one baby step at a time.