No-one likes the sound of the word “budget”. Every time the word “budget” appears, something bad is happening: you don’t get nice things. To make matters worse, budgeting can be a total bummer and mess up a perfectly good day with maths.
Sadly, for FIRE, this is essential.
Fortunately, we live in a time of pretty awesome tech that will help you do some of the brain work. Sweet!
This post will cover:
- Why you (and me!) need a budget
- Why paying yourself first is the most badass thing to do with your money
- Cool tricks and tools to use so you don’t need to do (too much) thinking
Why you need a budget
Working out what you can and can’t spend should be easy, right? You have X amount of money, you can buy Y or Z but not both until you get more money. Sure, why not.
Except that 2 in 5 workers admit to living payday to payday: they spend almost everything they have. At the end of 2017, UK households spent on average £900 more than they earned.
There is no doubt that having some savings is a good thing. However, Moneyfarm analysed data from the Office of National Statistics to work out that the average savings account for someone in my age bracket only had £3,544 in it. One in three people have nothing in the savings pot and over 40% of us Brits can’t live off savings for a month.
Seriously, a month. If recession hits, two in five people will be going hungry in four-and-a-bit weeks or relying on someone else.
Now, you could say: “but we’re not getting paid enough!”. Which might well be true: wage stagnation is a thing. However, the money isn’t all going on essentials.
Where the average salary goes
Here’s a nifty embed from the Office of National Statistics that shows where income tends to go in a UK household. Click on the blocks and it will expand into a breakdown for that item. Note that the cash amounts are based on an average household income, so are less reliable than the percentages, and mortgage payments are removed (although for whatever reason a provision for rent and mortgage interest is included…) but in general the percentages work.
Notice anything? For me it’s the transport costs. Owning a car is a huge burden, as you can see – so much of a burden, I got rid of mine!
My point is that some of these costs won’t even have been thought of. If you showed someone how much they were spending and where, I’m pretty sure they’d find more money for investments.
Which is exactly what a budget does!
This allows you to budget to save/ invest money, too. It’s called ‘paying yourself first’, and it’s an idea lovingly stolen from personal finance books such as this one below:
That’s an affiliate link to Amazon (if you’re going to buy it, I get a couple of Jeff Bezos’ share of the pennies if you go through that link) but it was the cheapest version of this tiny book I could find at 99p.
Why paying yourself first is the most badass thing you can do with your money
If you put your savings/ investments into your budget as a bill to be paid, you can pay into your savings confidently at payday.
Seriously, I do this. Money comes in: within 24 hours, I have some in a SIPP, some in an ISA, and I’m trying to work out where to skim more money this month for other spicier investments. Don’t get me started on side hustle cash: this is exclusively for investing or other side hustles.
Paying yourself first is a big middle finger to everyone else who wants you to spend your money on their stuff. Everyone wants to tempt you to buy the latest PlayStation game, another subscription box filled with stuff you didn’t need (but screw it, it was only a tenner a month…) or TV/ streaming service filled with the same crap you didn’t want to watch when it was popular. By paying yourself first, you’ve locked away temptation to spend. They can’t get your cash, you’ve sent it away.
Paying yourself first is the most badass thing you can do. It’s a big statement, and in my experience (and in countless other blogger’s experiences) putting the money into the “don’t touch!” pot makes you get really keen on keeping to the budget you’ve agreed. You just stop believing that the money is in your possession, then when the urge for a late-night pizza comes along you look at the tiny amount in your current account balance and realise that £20 of takeaway is almost half of your fun money!
How much do you want that pizza? More than you want those beers on Friday? What if your mates want to go out on the weekend? That’s the kind of mindset you put yourself in when you take the ballsy call to pay yourself first. It’s the best thing ever for FIRE wannabes like me, because you end up buying assets without thinking about it, just because that’s what happens on payday. Habits are powerful; might as well make them good habits.
Sure, but why is this relevant to budgeting?
You can’t pay yourself first without losing sleep at night unless you design a budget. How else will you know how much to put away? Therefore, budgeting is a powerful weapon for pursuing FIRE.
Use our future robot overlords to your advantage!
The robot uprising may be some time away. For now, we can use them to automate most of the routine tedious tasks.
If you can’t trust yourself to make the call every month, I strongly recommend automating this with standing orders or direct debits to your savings accounts. I can’t imagine myself getting old, so I’d have a hard time paying into my pension if I didn’t have a standing order coming out the day after payday to top that bad boy up. Future me will be grateful as they sip mimosas in the sun with that extra cash.
If you can’t imagine making large amounts of savings or investments, steal this idea and set up that transfer of money into your savings on the day after payday. Sounds stupid, but it works, and you’ll soon make sure you’re not in that sad 40% of people who might starve within 30 days of becoming redundant.
Cool tricks and tools to use for budgeting
We’ve covered paying yourself first, which is totally badass and if you’re not doing it you should think again before you dismiss it.
There are other, complimentary ways of designing a budget that you should be aware of.
Old School, hardcore budget
If you learned about budgets at school or from your parents, you’ve probably been putting them off your whole adult life, too.
The old school way is to record everything spent in a couple of months, then punish yourself for spending more than you’d thought. I was taught once to keep all my receipts somewhere – which is pointless, because receipts on thermal paper go manky and illegible really quickly. I’m pretty sure the idea behind old school budgeting is to torture you into spending less so that you don’t have to read so many crinkled bits of paper.
You can still do this. It’s a tried and tested method, where you input every receipt into a table and then add up what you spent where, then try to reduce it next month by giving yourself a set target to beat.
You can even upgrade this by using a spreadsheet to do the sums for you.
I… don’t do this. The future is now, we have the technology. Why would I do what computers can do for me?!
If the robots really do stage a revolution it’s a safe bet that I’ll spend my days rotting over a notepad doing Capchas as penance for my crimes against their kind.
Money advice service
The UK government’s Money Advice Service offers a budgeting tool that allows you to input spending for a month on a huge selection of things that you might buy in a typical month, then gives you a visual breakdown of where your budget will go.
I trialled it, and it’s simple but powerful.
The downsides are that it’s held on the MAS website and you need to already have a plan for how much you want to be spending. The upside is that you only need to work this out once a year, then ta-dah! You have a monthly budget that won’t sit unloved on a scrap of paper you’re about to lose.
Annual forecasting
I do this one!
I can work out from my quoted salary and my workplace pension contributions how much I get paid in a year. Don’t do the hard work; use this handy tool from moneysavingexpert.com .
This goes onto a spreadsheet and I take away all the things I’m expected to spend money on that year. Even stuff like Christmas presents and summer holidays go on it. It’s a chore but trust me the value soon appears.
This gives me an expenses figure that I can then divide per month. Boom. That’s what I’m expecting to spend.
I throw in my pension contributions and my ISA contributions that I’m definitely going to commit to, paying myself first like a boss.
This gives me a remainder. Maybe I could buy more PlayStation games with it? Maybe I need an extra hoodie? Nope. This is my “extra” investments money.
That’s the work done. I then make sure that every payday I pay myself first, syphon off bills, pay into savings pots for the big events of Christmas, my anniversary and my holiday, then whatever’s left over budget that month I can start using to look into weird and wonderful high-risk investments…
Use a modern challenger bank!
Whatever you think about the lack of branches to go to, modern challenger banks have phone apps that kick the crap out of traditional banks for budgeting.
I hear that Revolut and Starling can be quite good, but the one that I use is Monzo.
This isn’t a paid advert, by the way (although if Monzo offer me some cash for my FIRE portfolio, don’t get me wrong – I’m taking the money!). My partner put me onto Monzo while doing their PhD and I’ve switched my current account completely over to it.
What’s good about the bank is that you can set and break down your budget – monthly, then by sub-categories – and it automatically tracks them in the app. Every time you open the phone app up, there it is: a progress bar that keeps you honest. For a gamer like me, anything that shows a green life bar that goes through amber to red when you’re damaging your budget becomes addictive. I need that dopamine hit!
There’s a helpful “pots” feature that I use for the big ticket items, to collect their monthly tribute. I have one for Christmas and one for holidays at the moment. Anniversaries are an investment and come out of the spicy investment surplus.
Since I signed up, they’ve listed some chargeable premium accounts that offer benefits like insurance or whatever. I only use the free version.
I also like that they give you an annual summary. Want to know how much you spent at Lidl this year? You’re about to!
The inescapable truth…
Sadly, you’re going to need to work out your annual budget at some point.
There’s no getting around it. If you want to pay yourself first, like a total legend, you need to know how much to set that by. That’s going to take some thinking, but with things like the Money Advice Service tool, at least it might only be once a year.
Could be worse!
I budget ridiculously tightly because I want to achieve coasting FIRE in 10 years. That means I do the following things:
- I forecast for the year. Literally everything I can think of goes on it. I use Google Sheets because you can access it on a phone as well as the laptop. If you don’t like spreadsheets, use the Money Advice Service tool.
- After that, I put in my minimum level of pension. There’s a bit more to this, as I pay it partly into a workplace pension and partly into a SIPP, but importantly I want to be putting £500+ a month into that bad boy.
- I then add a “minimum” contribution to my stocks and shares ISA. Investments are important and need to be a priority.
- Big things, like Christmas presents and holidays, I budget for monthly. That’s right, £X a month goes into a savings pot for my holiday. I’m not ashamed by this level of geekery.
- I can then work out a remainder from my pay.
- I’m left with an annual “spare cash” budget. If you’re a regular person, that’s just to treat yourself with. For FIRE, I see that as “additional investment” funds.
- As my pay comes in each month, I pay myself first, bills second, skim off my savings pots for the big ticket items, then use Monzo’s budgeting trackers to keep my spending honest.
- Everything that isn’t paid out from last month for – say, being in COVID-19 lockdown and not spending my “fun” allowance – goes on extra investments.
You can have a look at a snapshot of my budgeting in my 2021 FIRE campaign plan post.
Screw you! I don’t believe it makes that much difference!
Try it and you’ll be amazed at what you build up. However, don’t just take my word for it!
Here’s a recent video by Money Unshackled that was, irritatingly, released after I’d half-finished this post.
I thought of it first!
You’ll see that they agree with me, even though (as they don’t like FIRE) their budgeting techniques are a little less strict than mine. However, a second opinion can only be a good thing, right?
If you haven’t tried budgeting before, give it a go and let me know how you get on.
