Pick up any personal finance book of your choice.
After the author has spent a few pages assuring you that they were once just like you and NOW look at how wonderful their life is, you’ll be onto Chapter 1.
And what will that chapter be about? Making a budget. I guarantee it.
This is far from terrible advice. It’s a staple of all personal finance advice because it’s logical, it’s easy to do, and it works for most people.
But as Google Analytics painfully reminds me every day, “most people” don’t visit my website. So by finding your way here, you’ve proved yourself to be an independent thinker who’s up for tackling problems a bit differently – and I do think there’s a better way.
Why wouldn’t you make a budget?
So we’re agreed that we want more money left over at the end of each month. Why might making a budget not be the best way to make this happen?
Your biggest expenses are fixed
Housing, essential groceries, childcare, transport. Add them all up, and what percentage of your total spending do they make up?
The answer will be at least 50%, but I reckon it’ll be north of 70% for most people. So you can dither around wondering if you should allow yourself a £10 or £15 per week coffee budget, but this is only a fraction of your overall spending so you’re only fiddling around the edges.
It’s a waste of brainpower
You only have limited time and energy to devote to your finances. Putting together the budget in the first place isn’t difficult, but monitoring your adherence to it will constantly suck up willpower and brainpower.
Your precious mental capacity is better spent on activities that will give you more bang for your cognitive buck – and I’ll tell you what those are shortly.
You’ll resent the whole endeavour
“Do I have permission to buy this book?”
“I fancy a kebab – is there enough left in the “eating out” budget?”
“Oh no – I’ve overspent on clothes this month.”
Miserable. A budget turns you into your own lecturing, hectoring schoolteacher every time you have to make a decision.
There’s a real risk that the whole experience will be such a grind, you’ll give up on improving your personal finances at all. Which is a shame, because there are activities that are far more enjoyable and effective.
What to do instead
Have a one-off “bullshit spending” audit
Slash and burn, baby! This is actually fun.
Go through your bank statements for the last couple of months and identify any expenses that can be reduced or eliminated.
Anything recurring – like subscription services – are perfect for cutting because you’ll get the benefit every month from now onwards. One-offs are fine too, though: you might be stunned by the cost of going to that concert last month (£120 for tickets, £50 for dinner beforehand, £50 for the babysitter) and decide to do fewer outings like that in future.
Here’s the key though: only eliminate spending that doesn’t make a significant difference to your enjoyment of life. This is about trimming the fat – not denying yourself all earthly pleasures.
If you absolutely loved that concert and you spent weeks anticipating it in the run-up, keep doing things like that! But we all have habitual spending which – when we sit down to consider it – doesn’t move the hedonic needle.
Conservatively, I reckon you’ll be able to take 10% off your spending while barely noticing it. You can even set yourself a target to cut by a certain amount, if that makes the exercise a fun challenge for you.
I said “one-off”, but bullshit spending always sneaks back in – so this is an exercise worth conducting once a year. Maybe on your birthday so it’s easy to remember. (Joking – even I’m not that weird.)
Slash your biggest costs
Housing costs take up 30% of the average household’s income. That means if you can find a way to reduce your housing costs by a third, you’ve just reduced your overall expenditure by 10% in one go.
The same logic applies to childcare costs, transport, and any other big fixed costs applicable to your situation. None of these costs is easy to reduce, but the ROI is huge.
So what could you do?
- Switch to a cheaper mortgage, if one is available
- Move to a house that’s smaller or less fancy
- Move closer to work (or move work closer to home) to eliminate commuting costs
- Yank your kids out of nursery and put them to work up the chimneys
- Start commuting by bike instead of car or train
- Start a new life in Bali
- Change your working patterns so you don’t need so many hours of childcare
There will be lots of other options too, once you put your mind to it. Don’t expect any of them to be easy, or to save a significant amount of money without compromise.
There might be nothing you can do – in which case, at least you’ve tried. But chances are you’ll generate at least a few “somewhat unpalatable” options, which you can then weigh up against the money saved.
Track what you spend
This is my secret weapon. It’s how I keep my spending consistently reasonable without going anywhere near a budget.
It works like this: every time you spend money, note it down. For maximum psychological impact, do it immediately afterwards rather than doing it in a batch at the end of a day.
The way you record it doesn’t matter: the Notes app on your phone is perfectly good enough. I use a free app called Toshl (many others are available), because it adds everything up for me and you can do some whizzy data analysis by category.
Just note down:
- The date
- The amount
- The category of spending (eating out, coffee, clothes, entertainment, groceries, etc)
- Optionally, a description of what you bought
If it takes more than 5 seconds per entry, you’re doing it wrong.
Don’t worry about recurring costs like subscriptions or big regular ones like your mortgage, train season ticket, gym membership etc – because you’ve already done what you can with those in your one-off bullshit spending audit. The point here is just to fix the steady drip of daily spending by making yourself more conscious of it.
Here’s the magic bit: you never have to review what you’ve spent. I never do. You’ll just naturally spend less than you otherwise would, by being conscious of what you’re doing and accountable to yourself.
Implement a two week delay before any larger purchases
I know, this is veering dangerously close to conventional advice – but it’s worth including because it works unbelievably well.
It’s simple. When you decide you really must have a new phone, a fancy accessory for your bike, a juicer, or anything that costs more than (say) £30, tell yourself: “self, you can totally have this – no worries! You’ve just got to wait a couple of weeks”.
You’d be astonished how often the burning desire completely evaporates before the two week wait is up. I had this recently with an iPad: I got completely obsessed with how it would revolutionise my reading and note-taking, and got deep into researching specs, features and accessories.
Two weeks later? Meh. I’m fine just reading on my phone, and can I really be bothered to worry about yet another thing that needs to be kept charged up?
What if you do still want this magical item at the end of the waiting period? Totally fine! Go ahead guilt-free. This isn’t about denying yourself what you really want –just introducing a bit of friction to make sure you don’t act on a passing whim.
Two weeks works perfectly for me: I can comfortably sustain a burning desire for a week, yet a month seems like for-e-ver to wait. Feel free to experiment with this, though.
Fill the gaping void inside yourself
I’m being glib, but it’s basically true: you only spend money when you have the belief (rightly or wrongly) that what you’re buying will make you happier.
If you’re already happy, the bar for a purchase making you even happier is high – thus less spending.
If you’re chronically unhappy, you can chuck all the consumer goods and “experiences” you want into that back hole, but you’re never going to achieve escape velocity.
Go me: “somehow bring about an enduring change in your entire brain chemistry” must be the least actionable personal finance advice ever published. But that’s why everyone tells you to put together a budget: they get to write a nice easy article, you get an activity that makes you feel like you’re doing something useful, everyone goes away happier.
Working on yourself isn’t a task you can check off on a Sunday morning over a (“that better not be from Starbucks!”) coffee. But it works. Oh, does it work.