Budgeting isn’t easy
Or rather, making a budget – writing one down, on paper – is easy, sticking to your budget isn’t.
To stick to your budget, you’ll need strong willpower or a clever technique to help take a lack of willpower out of the equation.
We can’t help you improve your willpower, but we can share a technique we’ve discovered really does help you to stick to your budget and not overspend.
The technique is call piggy bank budgeting.
Before you start
You need to understand two things:
- You can’t trust your banking app. Why? Because it lies. It only shows you a simple snapshot of the scene on any given day. It isn’t as good at showing you (apart from a day or two in advance, it may show ‘pending’ payments) what’s due in or out over the month, when direct debits will be taken or when you’ll need to go shopping. It’s a mistake to think that just because there’s cash in your account your budget is balanced and you’re in the black. However, obviously, being overdrawn is a very good indicator that your budget isn’t balanced and you’re in the red.
- Don’t let your lifestyle govern your finances. To get your money in order, it has to be the other way around, you have to let your finances govern your lifestyle. As an example, rather than asking ‘what’s the cheapest way to do this?’ ask yourself ‘can I afford to do this?’.
What is piggy bank budgeting?
The piggy bank budget is fairly simple. It’s a technique that helps you to take as much of your spending away from your willpower (or lack thereof) as possible and automate as much of it as you can.
The main aim of this (and indeed any budgeting technique) is to balance your finances so you’re not repeatedly overspending.
To do it, you’ll need to work out what you need to spend on the ‘priority’ areas of your life (bills, mortgages etc) and what you can spend on the other, different areas of your life.
Once you’ve done that, you need to review and work out what the major areas of your spending are and pick four or five, at most, for your piggy banks to address. This could be saving for a wedding, holidays, clothes, birthdays, hobbies – basically, whatever you spend the most money on.
Once you’ve done this, and know how much you need and want to spend on the different areas of your life, you need to set up several ‘bills’ accounts – the aim is to make it as easy as you can to see what cash you have available at any given time.
So, each of the accounts (or piggy banks) you’ve set up will have money in it; each for a different purpose. Your main account should always be separate from your bills account, then you should have a further three to four accounts for the main categories (from the list above) that your spending falls into.
This could mean your accounts are split as follows:
- Bills and mortgage/rent
- Big purchases – car, kitchen, bathroom etc
- Savings and emergencies
Next, you need to set up standing orders from your main account to put money into your piggy banks. Always overestimate slightly – especially for your bills account -to make sure that you have the necessary amount of cash going into each account each month.
For example, if you’ve allocated £800 a year to spend on Christmas, you need to be putting £67 a month into that account, so you have your £800 ready by the end of the year.
Piggy bank budget accounts
- Your main current account
Your current account should be the central point of the whole strategy, so it’s important to make sure it’s a good one that pays you well and you find its app, website and/or nearest branch easy and convenient to use.
- Your bills account
It’s usually best to use a current account for your bills, as it’s likely that most of them are paid by direct debit – something that most savings accounts don’t allow. If you can, ask your main account provider if you can set up a second account.
If it isn’t, you’ll need to either find an account that doesn’t require a minimum pay-in per month, or at the least, doesn’t charge you if you don’t pay in its suggested minimum. Ease of use is more important for this account than perks and cash back are.
Interest also isn’t that important, as you’re unlikely to have much cash in this account for very long each month – it will be in with your salary and out with your bills.
It’s also important to remember that you can try to reduce your bill payments – have a look at our haggling guide to get tips on how you can do this.
- Your other accounts
It’s usually best to use savings accounts for your remaining piggy banks (or even a cash ISA), so you can earn some interest on them.
Granted, that doing this means you might not be able to get your cash out as quickly, but that’s not strictly a bad thing.
If you do foresee that you’ll need to access the cash from these accounts quickly, then you can use instant access savings accounts that are linked to your main bank account.
The result of the piggy bank budget
Once you’ve piggy-banked the cash you need for your bills and other spending, it means that whatever’s left in your current account is liquid, and is what you can actually afford to spend each month.
The other benefit is that you won’t be able to fool yourself and overspend anymore. It’s completely possible that you’ll realise that you can’t afford the holiday you wanted. But, more importantly, you won’t be spending more than you can afford and end up in the debt-cycle.
When you look at your main account, what’s left in it, will be what you can afford to spend.