From our archive. This article was published on 21 July 2020. Rules and amounts may have changed since.
One of the first steps in managing your money effectively is understanding how you spend it. This can help you make informed decisions about your budget, but also pay off any debts and build up a little savings pot more quickly.
Categorising your spending is the key. Expenses can be divided into one of the following two categories:
- needs: rent, mortgage and other debt repayments, food, energy, etc.
- wants: eating out, travel, new clothes, etc.
When making decisions about your spending, it is a good idea to keep this distinction in mind. Prioritising your needs over your wants can be a way to start cutting back on your spending.
It can also be useful to break your spending down a little further. It is up to you to decide how you divide up your expenses, but here are a few ideas to get you started:
- food
- rent/mortgage
- transport
- going out & entertainment
- fitness
- childcare
- travel
- shopping
“Review, budget and control your spending.”
If you look back at your bank statements for the past three months, you can see the total amount you spent in each category. You can then divide this amount by three to get an idea of how much you spend on average per month in each category.
Try to take into account any irregular costs that did not occur within those three months, such as road tax or your car insurance. Divide these annual costs into monthly amounts and include them in the category they fall under.
“Consider where you can make changes.”
Can you recognise yourself in these average amounts? Do you spend too much at the weekend and then struggle to make ends meet during the week? Could you save more if you cut back in certain areas?
You may find it easier to cut back on some things than on others. For example, it will probably be easier to spend less at the supermarket than to lower your rent or mortgage. But that does not mean you cannot make plans to reduce some of your bigger costs in the longer term if you feel you need to. Making plans is often a first step in the right direction. You will be surprised at how having a goal can influence your actions and how you can ultimately achieve changes that you might not have thought possible.
“Build up your savings buffers.”
It is essential to build up a savings reserve, and the best way to do so is to open a savings account that you cannot access directly. So not one linked to the current account you use for your daily and monthly spending. We call this savings account the “iron buffer”. In addition, try to build up a buffer for “setbacks” as well. Many people also build up a buffer for expenses that come around, for example, every three months or once a year, topping up this savings buffer from the household budget. On top of that, you can also build up a personal savings buffer.
If you can tell your needs and wants apart, keep your spending under control and build up your savings buffers to allow for possible setbacks, then you are safeguarding your personal finances in a good way. That is the first step on the road to financial well-being.
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