It’s all in the name
Kakeibo are actually cute budgeting ledgers used widely throughout Japan to help with both setting a budget and maintaining it throughout the year. We were inspired to try and make personal finances fun and manageable too. This is the first in the series of tips and tricks to assist with that.
Budgeting is seen by many as a dark art. Similar to predicting the future using a crystal ball or tea leaves. Well, I have some good news for you! As long as you follow our structured approach and invest a bit of time in it, you will be ‘levelling- up’ to budgeting shaman status in no time.
The importance of budgeting to your everyday life is dependent on your circumstances. For example, if you are living pay cheque to pay cheque and staying within your budget means the difference between feeding your family or going hungry, then arguably it is extremely important to you! You should invest at least enough time in it to make sure that the cupboards don’t lay bare. You are probably asking yourself “why is this going to be any different to the last post I read on budgeting?” Well, our approach has been established over many years of continually missing our own budgets and having to patch the holes each month with credit, which was an expensive and stressful process. We are very aware of how hopeless and demotivated that this can make you feel, but also what it takes to succeed. We now consistently meet (and sometimes exceed!) our budget and no longer need to top-up from other sources. You can too!
Firstly, I want to debunk a myth about budgeting. It is not just about putting some numbers and formulas into a spreadsheet, then burying it until the end of the month to see how badly you have performed against it. Yes, drafting a spreadsheet is going to be an aspect of the process, but there is so much more besides.
Secondly, there is a common misconception that we need to earn more just to get by. Obviously there are many who struggle to make ends meet and need to increase their income to be able to put food on the table, but we also need to recognise that earning more can take time. We have what we have now and need to learn to live within that. Set the foundations right and then continue to strive to improve your position.
Check out the infographic for a summary of the key points, then delve into the detail below to get started on your budget!
1. Understand your income and spending
This might sound like a no-brainer, but I can guarantee that each and every one of you will find some sort of cost that you had completely forgotten about, or that your spending in certain areas is far in excess what you lead yourself to believe. Follow these steps to analyse your recent history:
· Login in to your internet banking. If you haven’t yet set this up DO THIS NOW — it is very important for staying on top of your finances
· Download as much statement history electronically (i.e. in a spreadsheet not PDF) that your bank will allow. Preferably you would want six months of data, but you can work with less.
· Create categories to analyse transactions as follows:
- Income — salary, interest etc.
- Spending
- Fixed — mortgage, loan payments, insurances etc.
- Variable essentials — groceries, household essentials, fuel, heat, light and electric (if not covered above in fixed) etc.
- Variable nice-to-haves — eating out, clothing and fashion, fun days out etc.
- Savings — WARNING — do not ignore this category if you are struggling financially! It is important to have a ‘rainy day fund’, but also to save for the expenses that are not monthly — i.e. Christmas, birthdays, car service etc.
· Paste a categories against each transaction in your electronic statement history
· There will be some that you don’t recognise yet, so label these ‘other’ for now, unless you have a receipt you can refer to.
· You will also realise that there are either more categories that you need, which you didn’t note down originally, or you might need to refine them based on the nature of your actual spending. Don’t just create loads of categories though, try and keep it as summarised, but understandable as you can. This will be personal and based on your specific circumstances, so we can’t give you a definitive list unfortunately.
· Paste the down the far left-hand column (Column A) the categories, in the order listed above. Then label columns B onwards in the top row for the months of data that you have.
· Use the =SUMIFS([£amount],[month],[category]) formula to summarise the income or spending by month
· Use the =AVERAGE() formula to calculate an average for each category
· Review each month and compare to the average to find high and low months — determine if this is because items are seasonal or because income or spending for those categories include one-off items, which won’t recur in the future. Note any categories that are seasonal and which months are more expensive.
· Make notes about the things you have learnt about your finances, particularly those that surprised you, or those that resulted in pushing you ‘into the red’.
NB: It is important to capture all of your spending in this analysis, therefore if you have more than one bank account or credit card accounts that you spend on, then these need to be included also. Last year I rationalised our family finances by consolidating everything into one joint account. Unless you are Rainman, trying to keep a running total in your head of spending is basically impossible, having more than one account complicates things even further.
2. Create your budget
Now that you understand your finances, it is time to create your budget! This needs to be planned monthly, for at least 12 months out from the current month, updated on a rolling basis. Because I have recently been modelling some more fundamental financial changes, my budget extends out 24 months. This may not be necessary for everyone, but just have a think about how consistent your finances are, if they are ‘steady-state’ then 12 months should work perfectly well.
Set up your spreadsheet similar to the analysis performed above, i.e. with your categories listed down the left, then columns for each month of your budget. An example of our blank template is below:
Start filling in a row at a time and make sure that you alter each month depending on particular ups and downs that you have seen from analysing your history. Make sure that you don’t build in too much optimism, as this results in a budget that isn’t achievable and you become demotivated as a result. For example, if you receive a bonus from your employment, unless this is 80%+ in terms of certainty, then do not factor this in or instead, try and make a prudent guess. It is better to be in the position where this is an unexpected surplus, rather than a necessary income to make ends meet. It is a lot less stressful that way!
Don’t forget that prices generally do increase over time, therefore this should be factored into your budget. If they don’t end up increasing, then you will be left with a surplus, which you can save! Over the 12 months, I build in an expectation that prices will increase by 2%, this has proven to be a reasonable estimate overall. This will depend on where you live and the market in general. Keep an eye on the money pages of your favourite news source. Use the formula =[previous month spend]*(1+0.0018) in each month. Over the year, this will then roughly give you a 2% increase in the cost.
Do a sense-check of your budget, does it look like you have included all of your income and spending? A simple way that you can do this check is comparing the average that you calculated in step one of each category as a percentage of your income (i.e. mortgage = 20% of income) and then comparing that to your average over the budget you have just created, again as a percentage of income.
Is the budget you created realistic? Does it result in an attainable scenario? For example, if you have budgeted to spend more than you earn each month, or overall for the year, this is a bad position to start from! If this is the case, go back over the spending and see if there is anything you can cut out. Shop around for better deals, or maybe even get a second job or a ‘side hustle’. The message is simple, set yourself up for success, rather than failure. A recent survey showed that 60% of Americans spend more than they earn [NFEC, 2016]. This situation is not sustainable and was in the context of only half of the population having a budget in the first place. Arguably, a good budget is the starting position for financial health and well-being. For a budget to be sustainable you need to plan for a way of life that you are content with, cutting costs to the extreme might seem like a good idea, but long-term this will result in a big rebound and dissolution with your budget. Just like extreme dieting regimes!
Did you include savings? There are two essential categories of savings that you need to build into your budget — this is non-negotiable!
· Rainy-day savings — there are many different views on how much this should be, some say 10% of income, others are greater than this. Ultimately, if you have nothing to date, then you need to focus on building this up to create a pot that will help you in a time of need. Just start putting something away and make it a habit.
· Annual costs — there are certain costs which do not occur on a monthly basis, but instead make up big costs which are paid out once or twice a year. Examples of these are Christmas shopping, car MOT & service and car tyres. As most of us are paid monthly, it can be hard to budget for these if things are tight. Therefore, you should work out the total cost, how frequently it is paid and then put away an amount monthly to save up for these. For example, if your car service is an average of £200, then you should be saving £17 each month for this. You should track your progress and have a list of what your savings represent, so you don’t accidently dip further into your savings than you can afford, because you get carried away with the balance that sits in there.
The golden rule for savings is to make sure the budgeted amount is transferred (preferably automatically) out to the savings account the day you get paid, rather than putting aside anything that you are left with at the end of the month. Trust me, 9 times out of 10 this left over amount will be negligible and is not behaviour that will help you in the long-run.
Looks like you might have a budget ready to go then? Wasn’t that easier than you thought? Nice to know it is all over…WRONG! Setting a budget is just the beginning as you will now see in the next steps. These are the ones that most people don’t tell you about, but arguably are the most important in actually living within your budget and having something that is accurate.
3. Monthly budget maintenance
You could think of this a bit like Dickens’ A Christmas Carol — the ghost of Christmas past, present and future. You should analyse your performance against your budget in these three ways and at these times during the month. You need to build these into your diary and lifestyle and make them a habit. This is the key to budgeting success. Each is taken in turn below:
· Past
o When: First day of each month
o What: Review your actual income and spending against your budget for the previous month. You will need to get your transactions again for the month and summarise them like in step 1 above. Determine whether overspends in each category are one-off in nature (learn from these, but don’t change your budget), or recurring (revise your budget going forward to build these in). Focus your time on the variable costs, as these will be most volatile by their very nature, but also make sure that you do take a brief look at your salary and fixed costs too. Mistakes can be made in your salary payments and can be easier to spot with this method. More importantly though, if a big bill didn’t come out in one month for some reason, it will no doubt come out the next and you might be misleading yourself with the overall result/be stung next month unexpectedly.
· Present
o When: Weekly on the same day each week
o What: Never put off checking your bank account/budget position at fear of what you might find. I know that you do it, because I have done it so many times myself. The longer I left it, the worse the problem got. Eat the frog, and take a look! Having up-to-date knowledge of how you are tracking against your budget is essential in actually staying within it. If you know that you have overspent in one category, you can adjust your spending accordingly, to avoid going over budget. You need to protect your essential costs, they aren’t called essentials for nothing! So if you are overspending then the first thing to go are the ‘nice-to-haves’. Don’t just raid the savings that you automatically transferred. Work out a way to live frugally to get yourself back on track. A few months of doing this and you will start making it a habit to stay within your budget. Also, don’t use credit to get by unless you absolutely have no other choice. The little credit devil on your shoulder will tell you that it is only a small amount and you will pay it back the next month. Well, take a look at next month’s budget, does it look like it has the slack to take that repayment? No, I didn’t think so. Again, I’ve been there, the mind plays funny little tricks like this all the time.
· Future
o When: Once a month or when things change
o What:
§ Trim costs — review each of your key fixed expenses and note down when and if they are due for renewal. Focus on the biggest first, taking each in turn and shop around for the best deal. You could do this by taking one a month and doing your research. Ultimately, you should review these regularly and also not feel ‘locked in’ to all contracts. For example, I was recently shopping for my wife’s car insurance. By chance I wondered whether the multi-car insurance (including mine which was already in a 12 month contract), would be cheaper. Not only was it cheaper, but I will now save £622 over the year after the £50 admin fee I needed to pay to get out of my contract. Anything is possible!
§ Plan for the future — use your budget to help you model big purchases you are planning, or the impact of taking a different job for example. Make a copy of the budget and re-work it to see what effect each scenario has on your finances. There are usually far too many factors for us to consider in our heads, we often miss something and then come unstuck a few months down the line once we are committed to the new plan.
4. You are not alone
There are lots of other great resources out there to help you on your journey and plenty of personal finance bloggers to follow and chat with, to keep you on the straight and narrow. Some of our favourites on Twitter are:
@lottyburns, @keepthrifty, @millennialmoney, @RichSingleMomma, @undomydebt, @savvyinsomerset, @TheFrugalTeen
Look us up on our social media channels too and feel free to send us a direct message if you want to discuss any element of this post. We are always here to help!
