Managing Money for Beginners
Exactly one year ago, I decided I wanted to get a grip on my finances: How much I was spending, on what, my savings rate, etc.. Everywhere I looked for simple advice, I was told to budget. But how do you draw up budgets if you’re completely in the dark about your spending habits? If you’re unsure where to start, this blog is for you! I’ll take you through a simple process to take control of your finances.
Do a money audit
Before randomly setting spending caps, you need to get insight into what’s realistic for your life. This is why I challenge you to keep track of all your cash flows (income, expenses, savings, investments, etc.) for an entire year. Trust me, that’s less work than you think.
To help you along, I’ve made a very basic tracker template that does the trick. You can find it at the end of this blogpost! It is possible to create an automatic import of your bank statements to excel. However, I would discourage this, as in the process of tracking your expenses, you’ll start being financially conscious (even before budgeting !). If you know manually tracking is unrealistic for you: check out this video on the excel import.
Personally, I like to update my sheet monthly, but if you can get into the habit of doing it whenever money is transferred in or out of your account, that’s even better. If you struggle to do this consistently, I would recommend choosing a specific day (e.g. the first of every month) to import all transactions. If you have a habit tracker, definitely put it in there (and if not, stick around for my post on building habits).
You are not meant to be judgemental on yourself during this stage. It is only meant to collect data, so afterwards you can assess whether your money is spent in a way that aligns with you.
Trial budgets
After tracking for a prolonged period of time, the next step is to set up trail budgets. These are intended to be revised monthly until satisfactorily maintainable (and in line with your goals). If you have a certain savings goal to hit, or an entire year is too long for any other reason, I would recommend tracking for a single month at least, and afterwards setting up trial budgets.
How long the trial budget phase should last is dependent on the consistency of your income and spending. If you make and spend about the same amount every month, trailing for one or two months will be sufficient. If this is much more variable, I would recommend working with trail budgets during the tracking period, to limit the time spent on collecting data.
How to decide on a budget?
You’re ready to start allocating your money intentionally. But how to draw up a budget that you’ll be able to stick to? I’ve listed the tips that have helped me the most below.
Budget for your future self:
Think about your ideal future financial self. What amount of money do you have saved/invested? What is worth your money? What is not? In short: What steps do you need to take you to your desired financial reality? Having a clear vision on the person you need to become to achieve your goals will motivate you to take action, and build strong money habits in the long run. Taking actions that are in line with this future identity will reinforce the mindset you are trying to inhibit. James Clear gave a good metaphor for this concept in his book Atomic Habits:
“Imagine two people resisting a cigarette. When offered a smoke, the first person says, “No thanks. I’m trying to quit.” It sounds like a reasonable response, but this person still believes they are a smoker who is trying to be something else. They are hoping their behavior will change while carrying around the same beliefs. The second person declines by saying, “No thanks. I’m not a smoker.” It’s a small difference, but this statement signals a shift in identity. Smoking was part of their former life, not their current one. They no longer identify as someone who smokes.” – James Clear
This is backed by the Self Perception Theory: We look at our own behavior to determine our attitude towards something. Essentially, who you think you are dictates how you act, and what you do reinforces who you are.
Takeaway: Think about your ideal future financial self. Incorporate budgeting (actions) to make those goals happen. Your brain will start rewarding you for taking these actions, and you’ll build momentum, allowing you to reach these goals with increasing ease.
Set partial milestones
Dopamine is released every time you complete a task or hit a goal. This should be used to your advantage. Set small saving goals to enforce the habit and keep you motivated. These could be (bi-)weekly or monthly, depending on your preferences.
Allocate hours, not money
As the saying goes, time is money. Converting the cost of a purchase to the time it takes to make the money is something you’ve probably done before. This can be used in budgeting as well. Instead of deciding how much money you’re willing to spend on a certain category – for example, getting drinks with friends – it can be easier to envision how much time you’re willing to work for it.
Rule of thumb
Finally, a good rule of thumb is the 50-30-20 division. This entails that you should assign about 50% of your income towards your needs, 30% to your wants, and 20% to your savings (or investments). Though, of course, for a budget to be sustainable, it should fit your life, not the other way around.
Important!
When striving for financial security, an emergence fund is essential. Before saving for anything else, you should strive to be able to put aside about 6 months of living expenses. This is a super strong basis that will protect you against unforeseen circumstances and costs.
Investing
A good financial plan does not have to consist of saving only, investing can be a great tool to set yourself up for a (more) comfortable future. Want to start learning about investing? Sign up for the newsletter here to stay posted for my blogpost about how to get into investing!
The Tracking Template:
Additional sources consulted
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