WHETHER you make £8 an hour or £80, you can fall into the cycle of living from one pay cheque to another if you spend more than you earn. The key to breaking the cycle is finding a strategy that fits your income and goals. You need to get realistic about living within your means and getting back on top of your finances, not pushing your limits and hoping for the best. Don’t beat yourself up about this situation — you’re aware of it and addressing it. Use it as a lesson to understand how you got to this point.
Using our action plan, you’ll be able to set specific time-based goals and work backwards to figure out the bite-sized actions you’ll need to make, tweaking as you go along.
Visualise the end
Imagine the peace of mind you’d have with financial stability and without the constant worry of having enough to pay bills or unexpected expenses. Taking a step back and evaluating your priorities won’t suck the joy out of your life. It’ll do the opposite, by replacing fear and anxiety with less stress and focus. Apps like MoneyDashboard and OnTrees make it easy to track and categorise your spending and DebtManager to track your debts and repayment progress.
Make a budget
I can hear you thinking, ‘I shouldn’t have to, I earn good money,’ ‘It’s boring and time-consuming,’ or ‘It’ll make me depressed and angry.’
‘Doing a budget is what gives you control over your money, instead of your money having control over you,’ says personal finance expert Jasmine Birtles, author of Reward Gateway’s ebook, Navigating Troubling Financial Times. ‘You don’t need to know where every penny is going; if you have a ballpark idea of what you have to pay each month for bills, then you know what you’ve got left for fun things. There are lots of free online budget calculators on MoneyAdviceService, National Debtline and thisismoney.co.uk. The Monzo card from Monzo bank helps you budget.’
Decide on your goals and change your mindset
Jasmine says studies have shown that people are happier when they’re saving money than when they’re spending it, so long as they have a goal in mind. ‘Take time out and daydream about what your short-term and long-term goals are,’ she says. ‘Getting out of debt, saving for a house deposit, starting a family or launching your own business are popular ones. Work out how much money you need to have for these goals and how quickly you could achieve them if you spent less and maybe made some extra cash on the side. Once you have these goals in mind, it’s fun to see the money pile up, the debts go down and the goals get closer. You’re denying yourself the small immediate things for big future goals.’ After a while you’ll realise you don’t actually need as much as you think to be happy and you don’t have to own something to appreciate it.
Don’t let your lifestyle grow faster than your pay cheque
We’re part of a generation where keeping up with the Joneses is practically ingrained in us and can be hard to debunk. ‘There’s a lot of pressure to make sure you’ve got a decent social life and it’s hard to say no to friends when they ask you out for dinner or a night out,’ says Jack Collier, marketing director at social payments app, Circle Pay. ‘If you’re living in a house share, make sure you’re not burdened with deciphering all the bills. Spending between friends and not recouping adds up. Circle Pay lets you request and send cash like a text, so you’re not left out of pocket after a group meal.’
Try the ‘cash in my pocket’ system for certain budget categories, like food and entertainment, to make yourself more aware of your spending. Every month, allocate a certain amount to each category and put that in your wallet or purse. Spend only from that. You’ll be more aware of your habits if you physically have to hand cash over. Pay attention as you see it dwindling. Once it’s done, it’s done — harsh, but effective. For any big purchases wait until you can pay cash. Don’t automatically put it on credit. It’ll make you think hard about whether you really need it.
Make budgeting fun
That may sound like an oxymoron, but it is possible! Cutting costs doesn’t mean you have to cut fun from your life. Try pot-luck entertaining with friends, where each person brings a different dish/side/drink. ‘Setting regular milestones will help you on your budgeting journey, no matter how long it is,’ says Jack. ‘Giving yourself a reward when reaching milestones can keep up your motivation. Apps help make monitoring your cash a little less painstaking and might make it more fun by gamifying the job,’ he says.
Know what your priorities are so you can judge any random purchases against them. When you’re tempted to buy new clothes or something frivolous, you can visualise your goals getting further away. Try no-spend days or weeks, where you use what you have and, apart from essential travel, you don’t open your wallet.
Act like you earn less than you do
Living within your means is a basic tenet of getting control of your finances. ‘To curb bad spending habits, you should start by setting up a standing order for payday to move money automatically into a savings account each month,’ says Guy Simmonds, Nationwide Building Society’s head of current accounts. ‘You could start with a small sum and then increase the amount each month until you feel comfortable with the value of your ‘‘pay cut’’. As the money is gone straight away, you’ll adjust your spending accordingly in a new budget.’ But what if you’re self-employed or don’t have set paydays? ‘Most providers offer text alerts, which you can set to ping you when payments come in, so you can move money straight away. If you have a good period, move some of the extra into a savings account.’
Plug the small leaks
Where can you shave money off your daily routine? Re-evaluate how often you’re going to the cashpoint. Find a more affordable mobile phone plan. Can you raise the deductible on your insurance to get a better annual rate? Your deductible is the amount you could cover out of pocket if there was a problem. Find ways to spend less on the things that aren’t important to you. You’ll have more money for the things that are important. Unplug appliances and chargers when they’re not in use. You might not think it’d make much difference, but after a few weeks monitoring my electricity usage with my new SmartMeter, I’d shaved almost 40 per cent off my daily usage. It’s cheaper to charge your phone in your car, if you can.
Moving forward with a buffer
Getting a month ahead and building a buffer means you won’t ever have to wait nervously for payday. The bank syncing and goal tracking You Need A Budget (YNAB) system is legendary for helping people build better money habits, get out of debt and build a safety net. Read You Need A Budget by Jesse Mecham who developed the system after he got married.