LET’S MAKE 2024 THE YEAR OF THE BUDGETING BRAIN
Talking about money benefits all of us — and we need to do it more. Join the conversation with Worth More, our 2024 guide to better finances, from navigating savings, debt and relationships to negotiating pay raises and, above all, investing in yourself.
We all know that staying in control of our money is vital if we want to be calmer and confident in our lives. And yet so often many of us let our finances drift into a cluttered, semi-chaotic state, which is understandable: In the face of inflation and a cost of living crisis, it’s easy to feel helpless and daunted. Home ownership seems increasingly out of reach for many and incomes fail to cover basic expenses — particularly in the more precarious parts of the gig economy. It can feel as though good money management is never going to be enough to solve the systemic problems we face.
But my motto has always been “Don’t get mad, get informed.” If you can understand and manage what is within your control, you can beat the system in your own small way. It’s why we’re seeing radical trends such as loud budgeting — where people proudly declare their spending limits — and “no-spend” challenges proliferating online.
And it’s why I’m going to focus on a practical five-step program to simplify your finances in the coming weeks. Following these steps should shift your behavior in a way that will lead to helpful, long-lasting change.
Cultivate a budgeting brain
At its simplest, budgeting is about being aware of what’s coming in and going out so you can make informed decisions about your money. This is what I call the budgeting brain.
Activating the budgeting brain requires four stages of engagement — think of the acronym LOAD, as in “Time to LOAD up my budgeting brain!”
1. Look: Look for all your financial data, such as payslips, bank/credit card statements and bills, and gather it all in one place
2. Organize: Identify and add up all your income, essential bills and non-essential spending (which could be organized into different categories)
3. Assess: Pinpoint where you’re overspending (if you’re overspending)
4. Decide: Make realistic decisions about how you will spend less in future and create room for debt repayments and saving
I will discuss more sophisticated budgeting tools (see below) you can use later on to help you with this process. But for the first month, you can practise a very simple form of budgeting by simply looking at your bank and credit card statements and making a note of your three biggest areas of expenditure over the past week, outside your essential bills.
Sounds straightforward, right? But don’t be surprised if you find yourself reluctant to even glance at your bank statements. Why? Firstly, it requires us to confront our spending behavior, which can be painful. Secondly, it also forces us to face up to the things that aren’t within our control. We might also have limited choices in terms of raising our income, or reducing our rental costs.
But it’s important to push through that pain barrier by telling yourself that the first step is always the hardest — it can and does get easier. The more you engage with your financial behavior (albeit curiously and with self-compassion), the more knowledge you’ll gain and the better your decisions will become, which will free up more cash.
It’s also important to pick times when you’re not distracted or tired. I find Saturday morning is the best window for me. I’m not working, I’m feeling refreshed and ready for the weekend, and therefore I’m motivated to get my budgeting over and done with.
Go hunting for your spending triggers
Develop some additional insights into your spending habits by keeping a spending diary for a week, charting not only what you bought but why you bought it. There are good spending diary templates online, but you can also use a notebook or the Notes app in your phone.
Start to hone your insights by identifying specific triggers for your spending. I find most spending falls broadly into one or more of the following six categories:
1. Payday: Spending because it’s payday, and you have an undue feeling of abundance
2. Bargain: Spending because you see a bargain and can’t resist it
3. Magnet: Spending simply because you had the opportunity (i.e. you have a retailer’s app on your phone and it sends you a notification, or you pass a shop on your lunch break)
4. Pick-me-up: Spending to cheer yourself up after a bad day or experience, or as a response to more chronic or acute mental health issues. If this is the case, then please consult your doctor or seek expert help
5. FOMO: Spending to keep up with your friends, family, peer group or influencers, and celebrities
6. Convenience: Spending because you needed something in a hurry
Labeling your triggers can help you address them. For example, you may need to remove certain influencers from your feeds or unsubscribe from retailers’ e-promotions. Taking up a new hobby, especially a creative one, is not always cost-free but in the long run, it could save you cash by occupying time and energy you might have reserved for shopping or other spending. It will also fulfill emotional needs that were previously only met by retail therapy. For example, I go to an art class every week, and while it’s not free, I’ve found myself spending more time painting and far less time in the pub — a win-win overall for my finances and health.
Find the right budgeting tool for you
There are two practical components to budgeting — tools and techniques. Tools will allow you to build your budget, while techniques will help you manage it.
Let’s look at tools first. These allow you to gather up all your financial data and organize it in one place. There is a wide spectrum of budgeting tools available today, and that spectrum falls between two different points — manual and automatic. I have highlighted the most popular tools below, starting from manual:
1. Pen and paper from scratch
2. Downloadable budget template (via internet or spreadsheet software)
3. Interactive budget tool
4. Banking app with in-built budgeting tools (e.g. Starling)
5. Budgeting app or chatbot linked to your bank account
The pen and paper approach allows you to customize your spending categories so they’re personal to you (so yes, if you want a category for luxury skincare, knock yourself out). Some people also find that writing out their budget really helps them register the information it provides so they’re more motivated to change their behavior. The downside is that it’s time consuming — you’ll have to create it from scratch each month and do all the sums yourself.
A budget template, such as one offered through Microsoft Excel, gives you more of a headstart with suggested categories, but will also give you the option to personalize your outgoings. However, some templates can be tricky to navigate if you’re not familiar with spreadsheets, and you’ll still have to do the maths accurately yourself. Interactive budget tools will do more of the hard work for you, but it’s still on you to gather all the info the tool needs so it can give you an accurate picture of your finances.
Finally, there are banking apps with in-built budgeting tools that will automatically categorize your spending for you and provide helpful data for you to analyse (i.e. in a piechart). There are also budgeting apps that you can link up to your account to analyse your spending for you. These will save you the hassle of gathering up information and you don’t need to manually input categories or sums — that’s all done for you. But while these tools might save you time, they’re no substitute for active engagement with your finances and it can be all too easy to gloss over them. You’ve got to take the insights they provide and act on them.
Consider a new budgeting technique
If you have tried all of the above and are still struggling to organize your finances, there are several techniques you can try. Here are a few of the most popular:
The 50/30/20 rule: This is a ratio you can apply to your finances to keep them ordered, with 50% of your income going on essential bills (including debt repayments), 30% going on fun stuff and 20% going into your savings. This ratio can be tweaked — e.g. 60/30/10 — depending on your situation and goals.
Pay yourself a salary: You can do this by having two bank accounts. In one account, you receive your income, and you pay out your essential bills and debt repayments. You then transfer a set amount into the second account for day-to-day spending. Some banks allow you to achieve this separation in just one account by offering “pots” or “spaces”.
Zero-based budgeting: This is where you allocate every penny of your monthly income towards all your different outgoings, making sure your essential bills and any debt repayments are prioritized first.
Cash stuffing or cash-based budgeting: You can either withdraw physical cash and stuff it in various envelopes, each marked for different areas of expenditure, or figure out how much you can afford to spend daily and withdraw that in cash, leaving your cards at home.
Do a spring clean of your finances
Soon you’ll start to feel far more motivated and in control when it comes to your money. So, what should you do with your newfound financial confidence? I recommend doing a spring clean of your finances.
Declutter your direct debits. Go through all your memberships and subscriptions, checking for both monthly and annual recurring payments. Get rid of any you’ve forgotten about, don’t use or aren’t getting good value from. Have a one in, one out rule — for every new subscription you sign up for, you have to chuck one you’ve already got.
Streamline your debts. If your credit card debts have ballooned, the interest will weigh heavily. Prioritize whittling down your outstanding balances by shifting them onto a 0% balance transfer card. Commit to paying off what you owe in the interest-free period, and cut up all but one of your cards so you’re not tempted to use them again.
Consider switching banks. Unless you’re really happy with your current account, look at other banks in case they offer better budgeting tools, customer service and ideally incentives in the form of upfront cash, interest or cashback. The current account switching service helps to ensure the transfer is seamless and occurs within seven working days.
Plan ahead on your bills. Find all the renewal and expiry dates for your bills this year, including your mortgage, broadband internet and car/home insurance. Make a note of them in your calendar and for your broadband and insurance deals, make an additional note three to four weeks before that date to shop around online for better prices. With your mortgage, you can lock in a new deal between three and six months ahead of it ending. Mortgage rates are now dropping to their lowest level since the mini-budget crisis of 2022, so if your mortgage lender keeps dropping their rates, you can ask to be moved onto the latest rate right up until your current deals.
Iona Bain is an award-winning journalist, broadcaster, speaker and author of Own It! and Spare Change. She is BBC Morning Live’s resident financial expert.
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