In “My Simple FI:RE Plan“, the first step I mentioned was doing a budget. So honesty time, ……..yeah…….yawn! I hate budgets. But guess what? If I had actually made one years’ ago I would have been in a much better place by now.
Funny story, my ex-wife hated my lack of budgeting so made me sit down one day and work out a house budget with her. It ended up with her seeing how much money I didn’t spend or invest, halving the amount she put in the joint account and me doubling what I put in. Well fuck. If I had a budget then I would have been saving or investing more, and wouldn’t have got shafted in THAT deal.
So the reality when it comes to budgets, no matter how far you are in the fire journey, you probably need one. And I am sorry to start here, but we have to. Because if you are cocking this bit up, you are on to a loser straight away.
What is a budget?
In simple terms, a budget lets you know what money is coming in, and what you have going out. And the only way to create any real wealth is to have more coming in than out. Simples. And if the opposite is true, all you are doing is creating wealth for someone else with your spending and debt. They love you. You shouldn’t love them. Because everyone gets rich but you. That’s shit.
So we have to start with the dull part of budgeting, and there are a few ways to do it:
- Use an App (there are loads, of varying quality)
- Use good old paper and pen.
- Use a spreadsheet (Excel, Numbers, Sheets whatever)
Personally, I like to start with pen and paper while I can work things out. Plus, I get to doodle in the corners of the page when I get bored (I’m sorry, I can’t pretend budgets are fun, just necessary). But seriously, I like to start with writing things out longhand and then I transfer it all to a spreadsheet once I am happy. It’s just the way my brain works.
So before we get to the remotely interesting bit of taking some purposeful action, we have to do some very simple research work.
What’s coming in – income
We need to know how much money is coming in and where it comes from. Think about wages. Rental income. Pensions. Investments. Social payments like welfare or child tax credit. Side hustle money. Payments from renewable energy. The money mummy gives you every month (seriously? we are having a “grow up” conversation at some point). All of it. Let’s be honest, if you are reading this and are still early in the journey, most of what you have coming in is your wages from work. And don’t worry, that is like 90% of people. OK, that’s a made-up stat, but you get the picture. Most of us get all our money from wages. £32 a year from selling old stuff on eBay is a bonus, not income.
Write it down, line by, and how much it is.
Know the timeframe
Now we have your after-tax income. Next, we need to know when it comes in and how often. Weekly, fortnightly, 4 weekly, monthly. We need to know this because working out a monthly budget based on 2 or 4 weekly pay leaves you a few days short each month. And that’s 24 to 36 days a year that you aren’t counting for. See the problem? That’s about 5 weeks each year we have expenses, and no income if we do things monthly. A few extra working days each month where we buy lunch at £4 a day is about £150 we end up in debt. without trying. We inhale the detail people!
What’s going out – expenses
So we know what we have and when we have it. Now we need to know what we give other people (boo). We need a new list. Find out what you spend, how much, and when they happen every month.
- Housing. Could be the mortgage or the rent. But also include insurance, council, or property taxes.
- Utilities. The water, gas, electricity, oil, solar, broadband.
- Food/groceries. What you eat and drink but also remember all that chemical shit you use to clean the house.
- Travel costs. Car loan, lease or rental payments, insurance, fuel, breakdown, bus pass, rail ticket, charging the Tesla.
- Fixed expenses you are committed to. Gym, TV, Netflix, amazon prime, cable tv, Disney +.
- Kids stuff, if you have them. School meals, clothes, activities, childcare.
- Savings/investments. Those regular savings like monthly ISA, pension, LISA, JISA savings account, etc.
- Fun money. Because we should do things we enjoy with money, even if it’s as simple as catching a bus somewhere for a walk, buying a book, or spending a night quaffing cognac in Whites. We have to enjoy some of that money!
- Debt repayment. Any other debts? credit cards? loans? DFS 4 years interest-free credit for that corner sofa? Personal loans, HP, Paypal credit.
- Anything else you can think about. I don’t know EVERYTHING you spend your money on (wink wink)
The one extra thing I would suggest also adding is any committed or future planned spending. Is your car going to need replacing in two years and you are saving up? Do you save monthly for a holiday? Christmas? This is a good way to plan, and these amounts should be a line in your expenses in the budget. Dave Ramsey calls them “Sinking Funds” and you can read about an example here. We like planning. It’s purposeful. and shows you are thinking about the future.
Review the records
Simple check time. Once you have everything down, go and grab your last 3 months’ bank statements and check them. Really check them – we need to know that you have everything down. Looking through the statements will scare you when you realize what you spend on KFC or a night out, but it helps you see anything you missed. And maybe ask “What the fuck?” on the odd thing.
- Have you written down the right amount of money coming in? Do the bank statements confirm that?
- Are there any expenses that you missed?
- Is there anything I pay once a year that I have missed? Amazon prime anyone? Grrrrrrrr
Now compare the two – more coming in, or more going out?
Draw up the budget
So now we get to the bit of budgeting that is remotely interesting – sorting the mess or enhancing the success. It kinda depends on which one of those two you are in, although some people love going for a bit of frugality to save those pennies!
If your budget number at the end of the month is positive, that’s awesome! It’s always worth considering if you can save money, so take a look at the actions below, but you can also roll on the next step about debt (when its ready, sorry). But think about saving a few extra pounds, it’s all useful for the future!
If you are in a mess, I’m sorry. But you need to face up to it and sort it. Too much spending, too much credit card, too much car, too much house. Not enough income. The five things that will kill people’s wealth. And all things you need to look at to help balance those numbers, and have to get the outgoings below the incoming. You have two choices: reduce the spending or bring in more money. Plus, if you are in a REAL upside-down mess, then consider one of the debt charities, such as StepChange or Debt Advice Foundation. Get help if you need it. No shame.
If you go after reducing spending, and I really advise that you do whatever your situation, start with the fluff. The nights out. The takeaways, Netflix, the monthly cinema pass, the gym membership you never use, those magazine subscriptions. They are nice, but you don’t need them. They can all go and your life will not be worse off.
Then take a look at that spend that can be delayed. Honestly, there is probably no need for a new tv and the one you have is big enough, the car will very likely be fine for another year, agree to a cheaper birthday with the other half. Do you really need those holidays? I know, they are great, but does missing a year put you back in control?
Want more income? That’s often harder to do. “Side hustles” are the thing at the moment, along with “passive income”. Know what they are? Bullshit. Its a lot of work to build something that creates passive income, like you need expert knowledge, to create a course and have it constantly sell. Or write a book. They all take a shit load of work in order to be “passive”. And side hustles? Most don’t pay shit. The easiest way to get more income is to work more hours at your job or work more hours in a different job. There is no disgrace in being a cleaner a few hours a week, or working a bar, being a barista, driving a taxi, working in McDonald’s. They all bring more money in, and are likely to do it quicker and with more income per hours than bull shit “side hustles”.
Whatever you do, you need to make sure it is reflected in the budget – if you create more income, add it into that column. If you get a saving, take it and put it in the budget. We need to keep out eye on that number at the bottom – more income than the expenditure is the aim. Keep looking at it and working on it until the balance is there or we can work out how to pay debts down to free up money (see next step!).
If this step takes some time, then that’s fine. It’s kind of the basis of everything else we do – the debt payment, the savings and investments, everything. And knowing where to look to save money will help all the way through the FI:RE journey. Its a life skill to understand what shit you don’t need to buy and where you can save cash.
Once you have the budget sorted, then we work out what is left over to start addressing that debt, which is our next step! Lets move on!