Most personal budgeting tips/tools will advise you to focus on setting goals. I’ll quickly breakdown how they work:
1. Set a goal of how much you believe you need to save to have the “thing” you want;
2. Determine over what timeframe you would realistically like to have that “thing”; and
3. Based on steps 1 and 2, calculate how much you will need to set aside each fortnight to achieve this financial goal.
Maintain commitment and discipline over this timeframe to achieve this goal and accept that you will have to make sacrifice today to achieve what you want in the future.
Cool. So, some people can do that. Most people, however, are committed to doing other things in their life, so managing personal finances takes a back seat. What these people need is their spending to be passively regulated – because they aren’t interested in doing it themselves. Here are 3 simple tips you can implement that will control your spending and save you money.
Save What You Can Spend
How much do you think you would reasonably spend a month on general living expenses (e.g. food, entertainment, transport, utilities etc.)?
I’m guessing many of you thought between $750 to $1,250 a month. You’re probably wrong.
If you were to simply add up your expenses from last month I’d guess most people would find themselves spending between $1,750 to $3,000 a month. When you add on your rent and any large one-off expenses (insurance, school fees etc.) it will explain why you’re struggling to clear the balance on your credit card, or never seem to have enough funds to get you through to next payday.
Try this instead. Set up a spending account that has a simple debit card linked to it. A quick call to your bank can have this set up in around 5 minutes (excluding the waiting and transfer times of course!). On the call ask the banker to set up a direct debit to send funds each week/fortnight/month (however frequently you get paid) from the account your pay goes in to, into this new spending account. The amount you are transferring each time is the exact amount you thought a moment ago was a reasonable expenditure for weekly/fortnightly/monthly general living.
This is a behavioural finance technique, and what it does is that it begins to regulate your spending, whilst reminding you in a more obvious way of how much you are spending. Kind of like flicking an elastic band against your wrist each time you do a taboo habit. It also means if you want to spend more money next week, you’ll have to spend a little less this week.
2. Have Your Salary Paid Directly into a Savings Account
By having your salary paid directly into your savings account you are saving by default as opposed to “opting in” to saving. This tip goes hand in hand with tip number 1. It also means that each time you want to spend more than what is available in your spending account, you’ll have to undergo the “walk of shame” and physically transfer money out of your savings account – this is because banks don’t let you spend directly from a savings account. This technique again passively regulates your spending for you.
Side note: I recently came across an article written by a major bank that had some advice for people setting up accounts for their new job. In it, the bank advised that it was better to have your income paid into your spending account, rather than your savings account. The reason being that it’s easier to spend your money when it’s in that account. Please note, it also means they will pay you less interest.
3. Plug the Hole
All your day to day direct debits should be set up on your spending account (e.g. utilities, subscriptions, memberships etc.). Why? Because when you run out of the funds in your spending account you will be forced to do an audit of where the money is going. Through this process you will likely find that you’re spending a fair bit of money on pointless things, things you don’t use, or too much on somethings. Some common cash leakages we see in borrowers accounts are listed below
Common Cash Leakages
Common cash leakages include:
- Utilities: Simply paying your energy bills via direct debit can sometimes save you an extra 20%. What’s more by simply calling up and saying you’re going to move your business elsewhere it can save you even more and help with your budgeting.
- Gym Memberships: That gym membership you have that you never use. It has to go. Cancel it. When you feel like getting fit again, go for a run outside or do some exercises at home. Once you’re back in the rhythm of it, sign up again – they’re likely to give you a month free when you sign up again too.
- Subscriptions: review all your subscriptions. If you don’t use it every week. Cancel it. It probably means you can likely do without it. Bank Fees: Monthly account fees. If you’re bank is charging you monthly account fees. Just change banks. You don’t need to be paying this and there are plenty of good banks that won’t charge you (e.g. NAB and ING come to mind).
- Interest Rates: Take 5 minutes to check what interest rate you are paying on your personal loans. It doesn’t matter if the repayments are low, it is getting the right rate that will save you money. If you can get a lower rate elsewhere then in most cases it’s a good idea to switch lenders.
- Insurance: Reassess whether the amount of insurance cover you have is really appropriate for your age, lifestyle and needs. Too often we opt into insurance products that we don’t really need.
There are plenty of other common expenses we waste money on without really knowing that we are. If you feel your personal finances are a bit like a sinking ship, don’t pick up a bucket and toss the water out, plug the hole(s).
By following the simple steps above you should be able to start saving some money by default without having to actively think about saving. We think these are 3 of the most simple budgeting methods that will help you save money without you even knowing you are!