Mastering your money
1. Do you save first? Or spend first?
There are two different money-management strategies. Here’s how to identify yours:
Spend first: You pay your bills and live your life first, paying for essentials like rent and food, and the fun things like dinners with friends or a night out at the movies. If there’s anything left at the end of the month, you put it aside.
Save first: You put at least 10% of income into your savings account before doing anything else. Then you pay your bills and buy your groceries and, if there’s anything left, you might catch up with friends for a drink.
It’s ok if you’ve been spending first, but if you want to bring your goals to life, you may need to make the switch. Challenge yourself to save first next time you get paid and see the difference it makes. Of course, this might mean some changes to your lifestyle, but it doesn’t have to be all bad.
Set up an automatic transfer so your bank moves 10% into your savings as soon as your pay hits your account. So you won’t even notice it’s missing.
2. Do you really need it?
Before making a purchase, ask yourself if you need the item or if you just want it.
Needs: Things deemed an essential part of life, such as food and rent. These are the things you should plan and budget for each month.
Wants: Do you need those new Balenciaga trainers, or do you want them? Wants are things we don’t need to live, but that we desire. They can often wait.
When it comes to non-essential items you want, check if you have enough budget after your savings and essential items. If not, wait until you do.
By stopping and thinking before making a purchase, you’ll start to master your money and make it work smarter for you. When you’ve worked hard for something, you’ll enjoy and appreciate it more and won’t feel guilty about the price.
Calculate how much you earn after taxes and essentials per hour – it’ll be lower than you think. Keep that number in your head and every time you find yourself craving something, divide the cost by your hourly rate.
If that $60 dress is calling to you, and your hourly rate after taxes and essentials is $5, you can ask yourself, “Is it really worth 12 hours? Is it worth a day and a half of work?”
3. Do you know how you’re tracking?
When you track your finances, you’re never in the dark about where your money is going.
An easy way to monitor your money is with a budgeting app that connects directly with your bank account. Many apps can track your finances in real-time, so you know exactly when and where your money’s coming and going.
Once you’ve identified your spending habits, you can set a budget for each expense category. Say you spent $250 on food the past two months, setting yourself a budget of $200 for food each month might be realistic and that extra $50 can head straight to your savings account.
Make sure your budgets are achievable so you don’t feel disappointed or annoyed with yourself when you don’t stick to them.
4. Is “budget” a bad word?
Setting a budget is an effective way to manage your spending habits and increase your savings. Budgeting doesn’t need to be evil or scary; once you get the hang of it and start seeing results, you’ll find it’s actually quite satisfying.
Want to know how to work out your budget? Follow these easy steps:
- Start with your income: Make a note of all money coming into your account each month. If it isn’t consistent, don’t worry, just work out an average and use that as a baseline.
- Calculate your essential expenses: Record your needs and calculate how much you spend on them, and how often. Check your bank statements for the past three months to get a clear understanding of your expenses. If you’re stuck in a contract at the local gym or other subscription-based want expense, include that here too, at least until you can cancel it.
- Work out how much you can save: After deducting your needs from your income, you’re left with an amount to cover non-essential items and savings. It’s not reasonable to put all of that to your savings (you have to enjoy life too!) but can you save 10% of your income each month before you pay for expenses?
- Set yourself a budget: Set target limits on all your want expenses each month. Check in on your progress every time you make plans with friends to see if you’re good to go.
Monitor your budget regularly: If your essential expenses or income change, record this and adjust your budget accordingly.
5. Can you be smarter with your spending?
Get smarter with your spending by coming up with ways you can reduce your expenses. If you’re spending too much or want to save more, check your bank statements or money tracking app to identify opportunities to cut costs.
Here are some examples of how you can change your money habits and become smarter with your spending:
Eating out often
Regular nights out with friends
Cook more meals at home
Make them a once a week treat
Review your subscriptions and cancel any you’re not using regularly or see if there are cheaper plans you can switch to
Invite friends around for dinner instead of going to expensive restaurants or bars
Think about the need or want scenario before making a purchase
By saving first, you’re making a serious commitment to saving for your dream future. It’s a great first step towards becoming Brilliant with Money.
Ready to take control of your finances? Keep following our FinLit series and start building a brighter future. We’ll be bringing you more tips and tricks to help you get smart with your savings, level-headed with your loans, intelligent with your insurance, and insightful with your investments.