I hate budgets.

For the more analytical of you, getting a fresh new spreadsheet out may be an exhilarating feeling, but I’m not that kind of person. I know, as a Financial Advisor you’d think it would be right in my wheelhouse, but generally I am more of a big picture person. This isn’t just because I don’t like doing spreadsheets. I actually do enjoy data and delving into the causes of things and understanding why something is working or why something isn’t. The issue is that I believe that focusing on the pennies of a budget takes up so much ongoing mental energy that would be so much better spent on trying to increase your income.

Budgeting is Painful

I’ve not yet come across an app or a method that makes tracking expenditure painless. Yes, I know there are apps out there that link to your bank account. I know that banking apps often group transactions together. I know that you can download the transaction history into your spreadsheet and add everything up that way. I’m sure that a tech savvy person could even write some code to map most of this across automatically. But all of it takes hours of dull, monotonous, soul crushing admin to get right.

This is what I mean when I say that your time would be better spent increasing your income. Properly managing a household budget down to the pound takes ages. On a regular basis, you need to get all of those transactions, add them all up one by one and put them in the right categories. I have actually done this myself for a few months in the past and the value proposition just isn’t there.

The Opportunity Cost of a Budget

I’m sure you’ve heard of the term “opportunity cost”. The idea is that any money (or time) you spend has a cost that is based on the potential benefit of something else that you could have spent that money or time on. It’s what you sacrifice when you choose one option over another. For example, you are deciding whether to invest some additional money into Apple shares or Tesla shares. If you choose Apple, the opportunity cost is the returns that you could’ve had if you’d invested in Tesla instead. In investment terms, you want to ensure that you are choosing the investment with the highest potential returns (at a given level of risk) to try and eliminate your opportunity cost.

We can use this philosophy anywhere in our life. If you’re at a restaurant and you’re trying to decide whether to have the big fat, double bacon burger or the meat lovers pizza (or a quinoa salad), your opportunity cost is what you might miss out on by choosing one over the other. Have you ever been eating at a pub with someone, and when the food comes out you’ve looked at what someone else has ordered and thought “I should have ordered that”? That's opportunity cost.

This is the same with time. The benefit of scrutinising your budget on a regular basis is that you will have a very close handle on where your money is going. You’ll catch the free trial app that went past its free date. You’ll notice that your broadband has increased and look to switch. You’ll see Costa pop up on the statement a few too many times and cut back on the flat whites.

In short, you’ll save some pennies, and maybe a few pounds.

What is the opportunity cost of all that time? In the hours it takes, you could be studying for an exam that increases your earning potential in your job. You could be creating a freelancing profile or website and building a portfolio to offer to potential clients. You could be writing blog posts. You could be making YouTube videos. You could be making things to sell on Etsy. The list is endless, and if you stick with it long enough, the potential upside is likely to be much greater than a few pounds a month.

Grow Your Wealth, Don’t Cut Your Expenses

Not only this but the whole mindset around budgeting is so negative and restrictive. It’s all about cutting your costs, slashing your spend and reducing your quality of life until just before the point where you can’t bear it any more. Stuff that.

Focusing on growing your income on the other hand is empowering. It’s motivating to be working towards a goal and building and improving our lives. All the time and effort you put into bettering yourself and levelling up your career or business comes with so many rewarding benefits. The feeling when you pass that exam or make a sale or get your first ad revenue is incredible! It makes you excited and makes you want to do more, do better, and grow. It’s a mindset that rewards looking forwards, not backwards.

So, I have an alternative.

Disclaimer, this alternative does still require you to make a list of your expenses, but it isn’t something you then need to ever really look at again unless something major changes. There will be no weekly, fortnightly or monthly “balancing the budget” in your household! The whole point is to get financial results without spending your whole life and all your spare time worrying about it.

The 15% Rule - Pay Yourself First

The point of doing a budget is to work out how much you are spending, and then look at how much you can afford to save into your investments. Every month when your pay comes in, you go back on the previous month's expenditure, look at where you went over budget, look at where you went under budget, adjust, monitor and review. This is a constant cycle of looking backwards and feeling guilty about the money that you’ve spent and the things that you’ve done.

Even if your money was spent on something that made you really happy, the budgeting mindset puts you in a place where you feel regret and guilt about it. The only time you should really feel any guilt about what you spend, is if it is impacting your life in a negative way. So a budget is one way to do that, but in my opinion it is an unhealthy way to do it.

So I flip it.

The end goal of a budget is to create a surplus on the piece of paper that tells you how much you should put into your investments every month. So if you have, for example, expenses in your budget of £2,000 per month and net income of £2,400 per month, you spend your money each month and then at the end, you hope you have around £400 left to put into your investment pot or long term savings.

The 15% rule does the opposite. Before you write down a single expense line item, take that your total household net (after tax) income, and knock 15% off it. So if your net income each month is £3,250 we’ll grab the calculator and do: £3,250 x 0.15 = £487.50

15% of £3,250 is £487.50. Which means that once we take this off your net income you have your new family expenditure allowance of £2,762.50. That figure right there is now your spending money, and the best part is that you can spend it on whatever you want. We’ll get to that in a minute, but first let’s explain this rule a little more. Rather than waiting until the end of the month to see how much we’ve got left to invest, we’re doing it first. The same day you get paid, you’re going to transfer 15% of your net income into your long term savings or investment accounts.

These are accounts that you’ve set up to meet your long term objectives. We cover the types of accounts and investments you can use for this in this article, but for now the important point to note is that it goes out first. We send it away like it never existed, and we then pretend that our income is 15% less than it actually is. Straight away, this removes the need to agonise over every spend for the next month and feel guilty when we spend £86 on a Tesco shop instead of the £72 in the budget. Whatever is left in your account is what is left until your next pay day.

There is a term for this that is often used in finance circles, which is: Pay Yourself First

What this means is that the biggest priority you should have for your income is yourself. Specifically, your future self. Think about it, all the money we spend is about paying someone else. Sending money to the utilities company to pay them for electricity. Sending money to Netflix to pay them for Squid Game and Love Is Blind. Sending money to Aviva to pay them to insure our house and car. Whilst obviously we pay all these things because they provide us with some type of benefit, we are still paying money to someone else.

The key point to paying yourself first is that you and your family matter the most. Your future lifestyle and happiness should take a higher priority than the ability to watch 400 football games a weekend or drinking M&S wine instead of Aldi wine or driving a 5 Series BMW instead of a 3 Series. It’s not to say you can’t do any of those things, but it is to say that you should pay yourself before you work out how much you can afford to pay to the BMW dealership or BT Sport.

A One Time Expenses List

Now that you’re paying yourself first by squirrelling away the first 15% of your net income, it’s time to make sure you can live on the rest. What we’re going to do here is take stock of your current expenses, and make sure that they align with your objectives and the lifestyle you want to live.

I’m not calling this a budget! It’s simply a list of your expenses.

These days, it’s pretty easy to get this information. Open up the banking or credit card apps on your phone and essentially just go through it. There are a couple of ways you can do this. The first is by using an old fashioned pen and paper to add it all up as you go along. The problem with that is if you fat finger the calculator you might have to start again, and unless you want to add everything up more than once you’re never going to know if you get it wrong. I like to use a spreadsheet (Google Sheets is free), and the way I lay it out is like this:

As you scroll through your transactions, just whack each one into the row it fits best into. So Netflix, Disney+ and Apple TV would all go into TV, doggy shampoo and dog biscuits would go in pets and anything you spend in Tesco or Sainsbury’s would go in Groceries. You’ll probably have to add heaps of columns to fit it all in, but that’s alright, just keep adding them as you go.

Once you have all the transactions in the spreadsheet, you can just run the AutoSum function to add everything up for you. This is tedious and annoying, but you will only have to do it once. I also recommend going back a couple of months if you want to do it properly. This makes sure that you are averaging out things like your grocery expenses and car running costs, and catching one-off or irregular costs like clothing purchases or hair appointments.

The most important thing here is the total overall amount you spend, on average, each month. This is the amount it costs you to live your current lifestyle.

This is a big difference over a budget. A budget is writing down everything we plan to spend each month. It’s easy to think of shopping for groceries as the 1 weekly ‘big shop’ and forgetting all about the £20 here and £40 there that we spend on forgotten ingredients or bits and bobs that we run out of during the week. It’s really easy to underestimate how many coffees you grab from Costa or how much all those £15 Amazon purchases add up to.

The main reason I want you to list things out this way is because it is real, actual spending that you have made. The way most budgets work is by getting you to create a plan of what you expect to spend each month. You look at how much you could possibly reduce all your expenses by, what you could cut, and then hope like hell that nothing comes up to mess with the plan! The problem is, something always comes up to mess with the plan.

Keep Your Budget Real

That’s the reason I like to do things this way. To go back and see what you actually spend your money on. It’s not some aspirational “perfect world” list of expenses that you could potentially stick to if you really cut back and lived a very boring and unfulfilling life. That’s not what we are trying to do here. As much as possible, I want you to be able to continue to live your life the way you have been living it. Getting your finances in order is about finding a balance between looking after your financial future and also enjoying your life now.

A key aspect to this initial step is to include everything. If someone in the family had a birthday which cost a few hundred £, don’t just leave that out as it’s a “once off”. There will be other family birthdays, there will be other one off costs. If you see H&M come up a few too many times and think, “I’ll just leave that out because I shouldn’t shop at H&M so much” - no! Include everything. We cover how to prioritise your spending in this article, but for now it is really important that you get a clear view of where all of your money went over the last few months.

Once this process is complete, you will have the total amount that it’s cost to run your life. If you’ve gone back more than one month, just add up all the totals and then divide it by the number of months to get the average spend each month.

Quick example:

£6,265 / 3 = £2,088 average spend per month.

Do it Once, Do it Properly

Now this is going to be, by far, the most time consuming part of creating your financial plan. Going through all of your past transactions takes quite a long time and it is boring and tedious. That’s why I only want you to have to do it once!

How long this takes will obviously depend on how many different accounts you spend from and how many transactions you tend to make. As a side note for just general ease of admin, I definitely recommend keeping your spending accounts as streamlined as possible. If you want to use a credit card, then only use one and pay for everything on it, including stuff like utilities if you can. If you want to use your own cash, have one debit card that you use to pay for all of your purchases and costs. If you’re in a couple, have a joint account that you both have your own card attached to.

This makes it so much easier to cast a quick eye on how things are going or to go back and double check anything in your transaction history. If you need to check 2 credit card apps and a banking app anytime you want to check a transaction, you just won’t end up doing it!

For now though, your budget is done! The next step, is to prioritise and match your budget to your ideal life.

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