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Finding saving, and keeping on top of your spending a total minefield? Financial advisor Paul Merriman shares his expertise on starting the budgeting plan you always talked about.
Ultimately, no one and no system can help improve your finances – only you can make that change. Set your financial goals, list your income, record your expenditure and see if you can reduce any of your outgoings. Set a limit for disposable income. Then, consciously decide how to allocate any surplus to achieve your financial goals.
Remember that budgeting models aren’t one-size-fits-all. What works for one person might not work for another. So, choose a strategy that aligns best with your financial situation and goals, or be creative and set up a hybrid of systems that work for you. You can find many apps that help you to track your spending. The askpaul.ie website also has a dynamic budgeting tool you can download for free to help measure your income and outgoings.
There are also many suggestions for budgeting models online, including the following:
The envelope system
We used the envelope system all the time in askpaul years ago, but since people stopped using cash, it became less relevant. The envelope system is a cash-based budgeting system. You allocate your cash for different spending categories into separate envelopes. When the money in an envelope is gone, spending is finished in that category. It was an effective system to avoid overspending, but it’s more difficult to use now in the era of Revolut and digital transactions.
I still think if you’re struggling with budgeting, you need to go to the ATM, take cash out and only use cash where possible. Otherwise, it’s too easy to tap dance around town with your debit card. Too many people are just going, tap, tap, tap, tap, and end up clueless about where their money has gone.
The reverse budget
This is also known as the ‘pay yourself first’ method. It’s a version of my ‘make your money disappear’ method of saving. With this system, saving and investing are prioritised. When your wages land in your account, a percentage of your money is whipped away by direct debit for savings and investments or retirement.
Only then can you start spending, and the remaining income is divided among your expenses. Using it as a system, however, doesn’t always work. Because there’s less emphasis on tracking your spending, you risk overspending. Then, you end up dipping into your savings anyway to make it to the end of the month.
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The values-based budget
This is about allocating money towards what matters most to you first, whether that’s travel or paying off debt. You spend your money in a way that aligns with your values. You start by deciding your spending and saving priorities and then build a specific financial plan around them.
You spend your money based on what provides you maximum happiness or value in life, while you spend less on areas that mean little to you. This is great if you decide that spending time with others makes you happiest or if buying your first home makes your heart beat a little faster. But it’s not so great if what makes you happiest is champagne-filled club nights or buying expensive gadgets.
Zero-based budgeting
This is a business model that’s sometimes adapted for personal budgeting. The basic idea is that your income minus your expenses equals zero at the end of the month. So, if your take-home pay is €2,800 a month, then everything you save or spend should add up to €2,800.
Every euro has to be accounted for and has a job or goal. This system promotes intentional spending but requires a lot of planning and tracking. It’s very time-consuming, so I don’t see it working over the long term for many. For me, the time cost is too high.
The 50/30/20 rule
This suits some people. It’s simple, flexible and suitable for beginners. It mainly involves setting up direct debits and tracking what you spend the rest of the time.
This system divides your take-home pay into three categories:
• 50% is allocated to needs and core essentials, such as rent, mortgage, childcare and food and whatever else is part of your core essentials.
• 30% is allocated for wants, like Sky Sports, handbags, evenings out, weekend breaks, holidays and funding hobbies.
• 20% is allocated towards savings, investments and debt repayment.
In an ideal world, the 50/30/20 would work. However, I don’t find it very useful because everyone is so different regarding their personal finances. I’ve completed thousands of financial plans for clients and met people who spend 80% of their income on core essentials.
Most of their money goes into keeping a roof over their head, food on the table, the lights on and clothes on their back. The 50/30/20 rule, in this case, is simply not going to work.
The advantages of this system are that it focuses your mind and makes you think about how you prioritise your spending. And I like any plan that emphasises the clearing of loans. I always encourage clients to rid themselves of short-term debt.
If you can shed that credit card debt costing €250 a month, it can be put into savings and investments. Having a small nest egg and no short-term debts can also be priceless in terms of peace of mind.
Paul’s Top Tips to improve your budgeting
1. Stick to a grocery list to avoid impulsive purchases.
2. Use energy-saving appliances and switch supplier every year to cut utility bills.
3. Practise mindful spending.
4. Create an emergency fund.
5. Pay off debts as swiftly as possible.
6. Continually reassess your budget.
7. Set realistic financial goals.
8. Adjust discretionary spending and review subscriptions.
9. Invest wisely to grow your income.
10. Use an app or spreadsheet to make tracking your budget more manageable
Money Made Easy: Simple Steps to Managing Your Finances by Paul Merriman is published by Hachette Book Ireland
This article first appeared in the March/April issue of STELLAR
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