Get a clear picture of your finances
Published on
Can you answer this question?
If I carry on like this, how much will I have left at the end of the month?
By the end of this post, you will be able to!
To some extent, how much you earn does not matter. What matters most is how much remains each month. Plenty of athletes earn millions, then lose it all.
Whatever remains, the point is to divide it consciously between enjoyment, savings and necessities. The key word is consciously!
We are not penny-pinching here. We are purposefully using money for what YOU value!
Do not feel like reading?
-
Insight: two accounts, with fixed and variable expenses separated.
-
Zero-based budget: only spend after the first month, then allocate every remaining euro to fun, repayments, savings and so on.
-
Reflection: where did it go well, and where did you go wrong? This is a behavioral exercise as much as a theoretical one.
Insight
A large part of your financial identity comes from your habits. To understand where you stand, examine them too. You can also introduce a few new habits to get a clearer picture of your situation. Earlier warnings let you adjust sooner, before there is a problem.
Structure your accounts
Spending has a recurring component and a variable component.
The variable component often consists of things you do daily or regularly.
Think of:
-
Groceries.
-
Snacks at work.
-
Petrol and coffee at the petrol station.
-
Eating out, food deliveries and so on.
Recurring expenses include:
- Rent and subscriptions.
I recommend running these two types of payments through two separate accounts.
Why?
Because you immediately see where you get extra value. You do not need to check fixed expenses every day either. Occasionally deciding whether you still need a subscription or could find cheaper health insurance gets you a long way!
Variable expenses offer the greatest opportunity for improvement. You want a clear view of them without other transactions mixed in.
To summarize:
-
Two accounts.
-
One for weekly variable expenses.
-
One for fixed costs.
I also like keeping only my weekly budget in the account for weekly spending. That stops you feeling richer than you are.
I transfer €70 into that account every Friday.
Budgeting
A budget helps you see whether your financial situation is improving or worsening each month or week, and by how much.
Your budget has different categories. You decide what matters and have a way to check it.
It also lets you set boundaries and give permission.
-
How much do you want to spend, and allow yourself to spend, on enjoyable things?
-
What is the most you want to spend on necessities?
Zero-based budgeting
The best model for creating a budget is zero-based budgeting. You give every euro a purpose.
That purpose might be:
-
Savings.
-
Fun.
-
Travel.
-
Repaying loans.
The purpose itself does not matter, but every euro has one in a zero-based budgeting system.
You start each month with a clean slate, without the previous month getting in the way.
Have money left first, then spend it
Another aspect is reversing the whole spending process: “First see what is left, then spend it.” At the end of the month, you transfer the money to savings or do something fun.
This is hardest in the first month, because you are probably used to spending first and seeing what remains afterwards.
The advantage is that you never have more month left than money. Instead, you have money left that you can spend on fun things. How great is that! :)
Questions and answers
Should I put everything into pots as soon as my salary arrives?
Personally, I do not think so. You often end up transferring money back from savings, making it hard to calculate how much you actually kept.
ING’s look-ahead tool does not really help with that either.
A weekly or monthly budget?
It depends. Personally, I use a monthly budget for some things and a weekly one for others.
For food, I prefer thinking in weeks. It stops things getting out of hand too quickly if you overdo the takeaway orders once.
The next week, you can simply try again.