Budgeting that Works when you can’t Stick to a Budget

Budgeting our personal finances is simple, in principle. So why do so many of us find we can’t stick to a budget? Why can’t we make our budget work? And more to the point, how can we start doing it successfully? I’ll break this into 8 stages for you and give you some methods to trial and error until you find a way that works for you.

1. Why Can’t I stick to a Budget – It’s not about the numbers
2. Re-Frame Budget to Spending Plan
3. Balance your (not a) Budget Honestly
4. Categorise Needs verses Wants
5. Ways to Track your Spend
6. Choose your Spending Plan Techniques
7. Try a Money Funnel for Budgeting, Spending, Saving
8. Plan a Money Date Night

1. Why Can’t I Stick to a Budget?

To answer that, let’s start with a different question.

How did the word “Budget” make you feel? What were the thoughts and feelings that came up as you typed that search term in and asked yourself the question?

My money is on your internal response being negative. If the word budget excited you, you’d already be making it stick, because it’s a positive, because you’re motivated to, because you are gaining something from it.

It’s those of us who feel dread, fear, anxiety, scarcity, guilt, shame or have had past failures that are still haven’t succeeded. The concept of a Budget can make us feel controlled, that we have to “do without” or deny ourselves. Or it shines a huge spotlight on our feelings of not having enough and the feelings that accompany that. It is those feelings, thoughts and past experiences are the very reason we can’t make or stick to a budget.

It is not about the numbers, the maths or the money. It’s about association we have with what a budget means to us. So take some time to acknowledge your thoughts and feelings, they are valid, the numbers come later.

And whilst we are turning budgeting on it’s head, let’s lose the word Budget altogether.

2. Re-frame your Budget to a Spending Plan

What is a budget really for? It is to channel the right amount of money, to the right thing at the right time. It is not a ‘money-diet’ but a healthy living plan. It is a Purposeful Spending Plan.

The purpose is really important. It helps you prioritise, make decisions and choices on when and what you spend your money on. It clearly defines what’s to be spent soon and what later. What is for monthly outgoings and what is for bigger financial goals. What gets spent today and what is saved and invested for enjoying later.

Now you have choice rather than external control, internal motivation rather than aversion, positivity rather than denial or lack. Your spending plan is about gaining, not losing, growing not shrinking and you’ve an outlet for your spending. You’ve put You and Your reasons at the centre of your money plans. This also reduces the likelihood of unplanned or emotional spending undoing all your hard budgeting work later in the month.

Admittedly not all spend is a complete choice. Somethings in our spending plan we have less choice on, the essentials, our needs. That’s why I start with that. But before we delve into the needs and wants, let’s remove another obstacle.

3. Balance your (not a) Budget Honestly

I’m sure Psychology has a term for this, but in my experience as a financial adviser alongside my own historic challenges with budgeting, we overestimate the income and underestimate the spending. In the same way we round up what we own and round down what we owe.

The closer the ins and outs are to each other it, the more likely it seems we are to round down the spend, so prepare for this and aim to go the other way.

Facing the honest truth of your money position is hugely important to successfully spend well. If this isn’t something you can face alone or it will create an obstacle, make you give up, avoid or procrastinate over then find someone to support you.

You only need to face this once. After that it’s reviewing and adjusting a known, you just have to face the truth first.

This next step is where some of us get stuck. The thought of facing the next part – the actual numbers can feel fearful, boring or overwhelming. So we decide we can’t, won’t or don’t want to. Then we don’t do it.

If you’ve got this far, keep going. by doing nothing, nothing changes. Break into into positive chunks. This is the change, this is where stuck starts to unstick.

4. Categorise Needs and Wants

Understanding the difference between your needs and wants will help you prioritise your spending. Whilst needs are generally those that you cant survive without, there is a subjective element too.

For example, I need to swim. It might be seen as a want as I would survive without it, but it keeps me sane, it makes me feel better, it helps me manage the onslaught of life. However if push came to shove I’d not swim in order to pay my mortgage or bills. (perhaps this is not the time to confess I once went out and bought Pizza whilst in tears over whether to pay the car insurance or creche fees, rest assured I’ve been there)

As easy as A, B, C

Here’s a straightforward A, B , C method you could use as a starting point for identifying your Needs and Wants and the cost of them. (Hint I do this Annually not Monthly then divide by 12, that way I don’t miss the annual bills and subscriptions.)

  • A is essential outgoings. These are the outgoings that you will always have to pay regardless of what happens in life, income, work. such as mortgage/rent, utility bills, agreed minimum debt repayments and monthly food shopping. If you need a car and fuel in order to earn your income they’d be essential too. These are needs.
  • B is important spend. These are the things you like to spend on, add value or purpose to your life and whilst you could go without them, they would make life less healthy or enjoyable. These are a likely a mix of needs and wants and will be specific to you and your family. A regular amount for saving and investing would go here if you haven’t’ already included it in the A category.
  • C is luxury or extra spend. These are the nice to have, the wants and luxuries that you would love to spend on when there is the money. Holidays, eating out, high value spend, experiences. Spend in this category is lowest priority for a monthly spending plan in but can be worked toward with the Save to Spend method.

Now is the time to make a note of all of your income. I do this annually first to allow for income that doesn’t fall into monthly periods, for example benefits, state pension or bonuses or dividends.

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5. Track (or Plan) your Spend

You can do the above method working forwards on a blank sheet. Simply write everything out, which category and decide what amount you need or want to spend on it. Be mindful of any tendency to under-estimate spend as mentioned earlier and be brutally honest.

Alternatively work backwards using existing bank statements or let one of the many finance apps do some of the work for you. If you work backwards, be kind to yourself and avoid judging and berating yourself for past spending behaviours.

Finance Apps like Snoop use open banking to link your chosen current accounts in one place and gives an overview of your spending. It also does some of the research for you by comparing what you are spending on certain bills eg energy, broadband and lets you know what you are paying in comparison.

Money Dashboard uses the same open banking technology to give you a complete picture of all of your bill spending from your linked accounts and can work well with multiple accounts including joint ones. Likewise Emma automatically tracks your expenses across accounts and give you insights into your spending behaviour

6. Choose a Spending (Budgeting) Technique

You now know your income. You know what you need to and want to spend and have it grouped into categories. You also know what amounts you either have spent or plan to spend within each category.

Sense check your Income firstly verses your Category A/ Essential Needs. Are they balanced? Is your income enough to cover these? If not, and you are running into uncontrolled debt, seek professional advice. Look at ways to increase your income and identify whether any savings can be made on those outgoings by switching, changing, moving. Repeat the above again including the Category B needs.

Budget Planners

These are not my favourites, but I have heard some people love them. You manually record on paper or spreadsheets a line by line incomings and spend. You can use the information you’ve used from previous bank statements of finance apps. We all learn and do things differently so give these a go if you like the details and accuracy. Try Money Saving Expert as an example of an annual budget planner.

Zero-Based Budget

With zero-based budgeting you start from scratch every time you review, probably monthly. Rather than look at what’s been spent historically or stick to an annual or master “plan” you allocate proportions or amounts of your known income into categories based on your changing goals.

Your aim is to categorise 100% of your income into the relevant categories (including savings and debts) This plan can change every month or year, so the budget is prepared from scratch every time. This can be time consuming and you can get caught out with annual expenses unless you’ve saved to allow for these from the monthly budget in anticipation.

Envelope (cash) Method

Not dissimilar to the zero-based budget this old style (think my Grandma!) but increasingly popular method works well to create clear categories, enforce discipline and makes your spending very tangible as you can see and feel every penny being spent and visibly see when it has gone. This is a cash based system though so can be a little trickier if you have a number of online bills to manage, but not impossible.

Again you allocate a spend against a category. You then physically put that amount of cash into an envelope marked with that category name. The rules are you can only spend what’s in that envelope against that category and when it’s gone its gone, until next month when you top it up again. You need to be really clear on your essential (category A) first and assign reasonable budgets to other spend categories.

Digital Banking (Envelope variation)

You can emulate the cash envelope budget with digital banking too.

Starling, Monzo & Revolut all now offer payments from pots/spaces or pockets. Using the “Digital envelopes” method you set aside money into different spaces/pots for specific spending (or saving). Originally used as a way to set savings goals which you moved into a current account to spend, all now offer a Bills management directly from those spaces.

7. Money Funnel or Proportional Method

These methods working in % rather than currency. You set a specific % go towards savings, spending (needs and wants), investing and gifting.

A proportional method can be a good way to start if you simply find facing the details too much today. But refine it before long because your goals, purpose and spend may not match the proportions given. Without identifying and being really clear on Needs, Wants and Purpose moving toward a new goal can be a challenge and it can be easy to overspend and take from your savings to supplement.

All income gets split into 3 areas in set proportions as soon as you earn or receive it.

50/30/20 Model

50% goes towards Needs (category A) 30% towards Wants (Category B) and 20% toward Savings for Financial Goals.

70/20/10 Model

70% goes on Needs 20% on Saving and 10% on Giving (or Debts if they need clearing first)

Flexible Money Funnel

Rather than following prescribed proportion, try a flexible model where you will vary the % as your goals and plans change.

Every penny I make, earn, grow or am gifted goes through my imaginary “Money Funnel” and the key difference is the first proportion is always automatically to Savings (and then investing). Always first.

I know I can manage on less (because I have done in the past) and I now know how much my needs/wants are and what proportion of my income that is. So I can adjust the savings, investing, spending and giving to match my longer term financial goals.

This took many tries to find what worked best for me. What works for you may be different and there is no one size fits all. So try a few and refine it as you go to suit you and your family’s needs.

8. Money Dates and Plan Reviews

Now what? This isn’t a stale document, dusty planner or never to be re-opened spreadsheet. Your spending plan or method is your tool to help you enjoy your money and direct it to the right things for you.

Set yourself regular Money Dates to review and refine. Get creative on ways to increase your income, define what you are saving for, reduce costs, pay debts or increase investments.

You now know what you are spending, where, on what and how much. This is your spending plan and you can shape, change and influence it to work for you.

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