I’m really excited to begin teaching you about investing: the best ways to invest; how to avoid the pitfalls and costly mistakes; and how to enjoy the process and sense of empowerment that investing can bring. However, many people jump into investing before they are ready. This article is part of a foundational series at Magical Penny to ensure that you are ready before you start seriously growing your pennies.
For many of us, saving money, really saving money, just isn’t practical right now. We’re at the start of a career, perhaps just getting to grips with a monthly salary. We all have expenses to pay and a limited income. For many of us, it’s not a question of having enough money left at the end of the month but how to survive when there’s still some month left at the end of the money. When this happens we may have a bank overdraft to cover us until the end of the month, or a credit card to tide us over.
But overdraft costs can soon add up and credit card interest can quickly get out of control, your balance increasing with interest and fees, resulting in even higher fees next month: the dark side of the power of compounding.
You may be tempted to wait until you get a pay-rise or a better job before you start saving. However, look into your future. You may be earning more but I’m positive that you’ll have more expenses too: perhaps a mortgage; children; a nicer car? There’s never a better time to get to grips with our pennies than now. Getting into the mindset is half the battle, but the next stage is just as important: developing a written plan: a plan to take control of your pennies.
What’s in a name? that which we call a rose
By any other name would be as sweet?
Shakespeare’s Romeo and Juliet, 1594
It might not have a sexy name….but it’s a powerful penny-building tool:
It might seem obvious to you or it might seem completely unnecessary, but a budget is so effective it’s almost magical!
However, even after I discovered the power of compounding I was slow to come around to actually writing a budget. Here’s a passage written just over a year ago when I began penning some thoughts on personal finance; the first spark of inspiration that, a year later, would become Magical Penny.
Sunday 21st December 2008
I have a confession. I’ve never written a budget.
After graduation when I started earning meaningful amounts my general philosophy was “Save everything you can”. And I did, thanks to my parents who let me live at home with most of my expenses covered until I found my feet post-university. My ‘save everything’ policy came about as I wanted to honour their generosity and set my money to work for my future self.
Whilst reaching saving milestones felt great to achieve, my “save everything I can” strategy was not perfect: Firstly I could not expect my parents to foot the bill forever. [Note: I had already moved out when I wrote this] Whilst I appreciated the savings opportunity that living at home gave me it was by no means easy adjusting to ‘home life’ after 3 years of university freedom. Secondly, watching my savings account balances grow felt great but was I really saving ‘everything’? Some months I would save a lot more than others. I was generally frugal but I couldn’t help but wonder if I could optimise my spending and saving further if I had some kind of plan.
I wrote this shortly before I had written my first ever serious budget. I gave it a go and a year later I can safely say that having a written budget each month has a powerful effect on your spending and saving habits. And it doesn’t have to mean you have to spend a lot less: in fact you can spend extravagantly on the things that you have decided in advance mean a lot to you, and if you can fit it in the budget, then the spending is guilt-free!
It may sound simple enough but here are 5 things to keep in mind as you set up your first budget (or to help you refine the one you already have in place):
Budget with last month’s income for the month ahead
Don’t rely on any additional pennies you think may come your way in the month ahead. Put last month’s income at the top of a page or spreadsheet and then write down all the things that you will need to spend money on in the month ahead.
When you first do this you may find that you already have financial commitments that are bigger than last month’s income. Don’t worry about this for now: the purpose of a first budget is simply to make you pay attention to what you are spending. Just get everything down.
Don’t push yourself with goals straight away
When I first started budgeting I set ambitious savings goals for myself:
“I’ll only spend ½ of my income and save the rest!”
Don’t do this in your first month of a written budget. You are bound to have forgotten something when you first wrote down all of your expected spending and setting ambitious goals will just make you disheartened when you miss the targets you set.
Don’t aim for perfection in a budget
Every month there will be things that will come up that take you off track. It took me about 3 or 4 months before I got anywhere near close to my written budget, and I was already being quite careful with my spending. But as time goes on and you make edits to your budget, you will get closer to the plan and will be able to start making measurable progress.
Start again each month
if you go way over-budget, don’t try to ‘catch up’ the next month. It will just make it harder. The great thing about a budget is that you get to start again each month, aiming to be ‘just a little bit better’.
Include a budget category for irregular spending
There will be things that you need to pay for but not every month. For example, if you need to pay your car insurance once a year, you could ‘budget’ 12 monthly payments to yourself then send in the lump sum when the payment is due. When you get really comfortable with saving you could even start saving a little for Christmas or holidays each month. However if you’re starting out with a budget then don’t worry so much about this: just try to get to the end of the month without adding anything to a credit card or going further into your overdraft.
Do you really want to grow your pennies? Consistency can be magic: By doing a written budget each and every month you will eventually be able to work towards more ambitious savings goals, and to ‘pay yourself first’ –saving money or paying off debt as the first thing you do each month rather than simply saving anything that is left: do this and you can ensure that you never again find yourself with some month left at the end of your money.
Have a dream. Have a plan.
There’s so many recent articles to help put your first budget together:
How to Build a Zero based budget @Bargaineering
5 factors that will determine what your budget will look like @balancejunkie
The one thing to do @Doughroller
Pay Yourself First @Sweatingthebigstuff
Let me know how you are getting on! What’s the hardest thing about budgeting? Do you have any tips that help you and may help others? Leave a comment and join in with the discussion.