Budgeting for Success
2019 means a shake up to my finances and a new methodology for budgeting for spending money, repayment of debt, saving money for the short term and the long term.
The end of 2018 was all about getting back on track with cash flow. Overdrafts needed to be repaid and safety fund money needed to be built up.
Now is the time to implement a strategy. I recently met up with Emma Maslin of the Money Whisperer website and we were talking about management of cash and she suggested a new method to me. Let me tell you about it.
You take your weekly turnover and put aside a certain percentage for business costs first. Let’s say that’s 10% of your turnover that you set aside for business costs.
You are left with 90% of your turnover to allocate to various pots. Here is my proposed split. With an example of a £5,000 turnover month
Monthly Bills 35% £1750
Fun Money 5% £250
Emergency Fund 10% £500
Debt Repayment 10% £500
Pension 10% £500
Tax 10% £1000
Holiday Fund 5% £250
Investments 5% £250
These are all the things that I want to be putting money towards for 2019. The percentages are a guidance and might vary a bit depending on the level of income each month due to turnover variability. I want to get used to putting money towards each of these things every month no matter how large or small the amount of money might be.
This is the monthly money I need each month to cover my half of the household bills. The bare minimum needed here is £1,500 depending on how much has been spent on the credit card that are paid in full each month. The intention with setting the level at 35% is that I should have more than enough money put aside here and anything extra that I don’t need for bills can go into extra debt repayment.
I want to have some money set aside for fun stuff, dinners out, a nice coffee, a trip to the cinema, clothes and have guilt free spending. Allowing myself 5% of the previous month’s turnover sounds like a perfect way to allow for this. Again, if there is anything left in this pot after the month has ended excess money can moved into debt repayment.
My emergency fund money has two purposes. It is firstly money set aside for those expensive one-off unexpected things that could happen. Hopefully not very often. Things like needing a new washing machine, or maybe the car needs some expensive repairs.
The other reason for holding this emergency money is just in case I have a low turnover month for the business. My income can be very variable, I have seen it vary by as much as 3k from one month to the next. I need a fund there just in case to dip into in tougher times.
I am aiming to get this emergency fund to 5k. Once that target is reached, I can start moving more money into investments.
I am (still) paying off a large chunk of debt. It feels like I have been paying it off forever, which to be fair is not far from the truth. There has never been a time during my adult life where I have been debt free. I have always had a balance, be it big or small, on a credit card. Most of the time it has been interest free, but it has always been there.
My aim now is to pay off the whole lot and not to live with a forever credit card balance. I hope to have this debt cleared before the tougher turnover months of summer 2019 kick in. Consider that a challenge! I have around 6k left to repay from an original balance of 16k.
2019 is the start of paying money into my pension scheme and I took the step of making the first payment on 19th January. I know that I still have debt to repay and some would argue that I should pour as much of my money as possible into clearing that first, but I don’t agree. My debt is 0% and I will get a much greater return putting money into my pension, first off, the 25% tax rebate. You can read more about my pension decision here.
Maybe one to include in the business expense section, I allocation a portion of my income for tax and hold it separately. I have a portion of my tax covered with my personal allowance and my earnings come via a limited company. This means two different tax bills to pay, personal tax in January and corporation tax in May.
I would very much struggle to get through a year without a holiday. Last year we really couldn’t afford it but sold the last of my Tesco shares to fund a bargain holiday to France Centre Parcs. This year I already have a nice pot set aside for holidays. I am very much looking forward to spending money that has been put aside, not going further into debt to pay for it.
And then we come to investment. I don’t put much into investments currently. Hence it falls at the bottom of the list. Again, like the justification with my pension I would rather put some money into investments with the chance of getting a decent return rather than throwing all of my money into that 0% credit card balance. Popping in £100 to £200 per month into my stocks and shares ISA feels okay.
So, there you have it. How I intend to split my monthly income. I think this will be an interesting one to revisit in 6 months’ time to see how much of an impact I have made on my savings & investment balances and my debt repayment.
The big intention here is getting used to behaving in a certain regular way. Re-engaging with the regular behaviour of putting money into a pension, into savings and investments and tracking how well I have done.