BOD003 - How Do I Budget?

0:00You would go into Tesco and buy yourself a sandwich and then write Tesco chicken and ham sandwich. I'm not going to be that grand. Let's go lunch. I'll try and avoid using socking. I think it's because you made it a verb. Socking. Hi and welcome to the Bank of Dad podcast. I'm Kate and this is my dad Pete. And we're here to share all the money lessons you weren't taught at school. No judgment, no jargon, just real talk. Yeah, that's what we're here to do. Yeah, no judgment. That's really important because we're not taught this stuff. so let's help you as best we can if you've got any questions you want to ask us then the best way at this point is to email us and the email address is hello at bank of dad dot show just mark it with like a podcast question or something like that use that in the subject line and we'll we'll do our best to answer and we'll probably add a segment in either we'll do a whole episode on it or we'll add a segment where we answer questions really quickly yeah it's good to know what you particularly want to hear about.

0:57So, amazing. So last time we kind of went into the why of budgeting, didn't we? Yeah, where the money goes. Where the money goes. Because it does. Because it does, yeah, exactly. And why it's kind of good to get to grips of that. Yeah, and sort of why so many of us get that sinking feeling when we check our bank account. It's like two weeks to go till payday. And we're like, okay, I'm in trouble. I'm having cereal for breakfast, dinner and tea and to avoid that we talked about being intentional with spending and really when it comes to spending exercising control means budgeting budgeting this week but before that we have the wanky word of the week it's that time again we still don't have an intro song I think we really need one we do need it I think it should be like choral choral?

1:49yeah can you not imagine like King George's choir and then just wanky I don't think we have the means to sort of commission a piece from I don't know, I think they'd be into it, maybe you know like the Westminster Abbey Choir I think they'd be up for it or we could get something knocked up with AI it's bound to be possible so anyway, what is this week's wanky word of the week? this week's wanky word of the week in, you know, on the theme of budgeting is, well there's two It's a couple of phrases, actually. And it is fixed versus variable expense. What do they mean? When you wrote this down, I thought it was not very wanky, but a lot depends on how you say it.

2:32Well, yeah, and if you're talking finance and you're going, oh, my variable expenses are a bit of miss this month. Wanky. Okay, right, fair enough. No? That makes sense. Yeah, right, so you can broadly split your expenses into these two categories, fixed or variable. And it's not rocket science. fixed expenses are the ones that are the same every single month. So rent. Rent. Bills. Car insurance. Yeah. You know, the stuff that is usually on direct debit. And it's the same or broadly the same each month, as opposed to food. Yeah. You might sort of broadly eat the same every week, but there's always variability.

3:10Yeah. You know, Uber Eats. Well, not that we have that here. No, we don't have that in deepest darkest Cornwall. that's not a thing one of my favourite things about going to visit Izzy in Bournemouth is Uber Eats Uber Eats but just Uber Eats and it's like here try this Korean cuisine try this Syrian dish you're like do you know what I will just because the option but yes yeah so that's what fixed and variable means so it's just to be aware of that okay cool let's get into it right so yeah like I said last week we talked about where money where it goes so now we need to talk about how we're going to stop it just disappearing, get in control.

3:53So to do that, we need to know exactly what a budget is. Yeah, I feel like budgeting has a bad rap. I feel like it sounds boring. I do think words matter, so maybe it's a spending plan. That sounds way more fun. Well, it does, right? Because I think budget, it's all about control, right? but the words do matter and I think you say okay actually I'm going to plan my spending people might be able to get behind that a little bit more sounds less restrictive than plan my not spending exactly it seems negative it seems restrictive it seems about yeah tightening the purse strings one on a budget yeah it's like well we all should be on a budget it's like the money equivalent of going on a diet yeah a little bit it's how it sounds really a spending plan we'll inevitably call it a budget throughout so just keep that in mind yeah yeah words matter we're going to say budget because that's easier but we think I tried to say spending plan.

4:48I reckon we'll have 10 seconds before you lose that. All right, go. What it is, though, is you get to decide and tell your money where it's going to go. Right. A lot of us, I think, are passive when it comes to spending. Oh, I don't know where it's gone. Or it's been a really expensive month. Well, it's like the month didn't spend your money for you. I know what you mean, right? There's no judgment, remember? But it's like the month isn't expensive. You've spent more this month. Yes, and whilst the circumstances may be out of your control, you can't fail at some routine or whatever, I guess the budgeting is going to help us to allow for those kind of things.

5:26It will. That's important because if you're going to plan where to spend, you need to be prepared for unexpected expenditures, and we'll get into that in a minute. Yeah. So that's what we're doing. We're telling our money where to go. I think that's like a core message. It's about being intentional and being in control as opposed to letting it happen to us. Do you have any good apps or ways to set up a spreadsheet? Yeah, right. Okay. So everybody's different and so things will connect. When I first started doing this myself, I carried a notebook around with me. Notebook? Yeah, I know. Because it's the dark ages and we didn't have decent apps then.

6:03Well, sure. As in like with you? Why would you carry it with you? Because you spend as you go. So you would go into Tesco and buy yourself a sandwich and then write Tesco chicken and ham sandwich. Oh, man, I'm with that grant. You'll write Tesco lunch. Okay. Chicken and ham sandwich was a bit dicey. So I think it's more about, you know, it was just a case of it was tracking. Now we talked last time about spending and certainly budgeting, spending planning, being forward-looking, right? Yeah. Right, so as opposed to it's not, tracking is helpful insofar as it helps you stick to the budget that you've planned.

6:45For years, I thought I was budgeting, whereas what I was doing was tracking, and that's only half the story. You need to decide where the money's going to spend and then make sure you stay on track. Okay, so if you're like, oh, I've actually spent more in the first two weeks on food, that if I continue that pattern, I'm going to go over my food budget, so therefore I need to be conscious. So that's why the tracking would help the forward thinking. Yeah, that's right. So tracking is important. So there's a bunch of ways you can do that. You can do it with a spreadsheet if you're that way inclined, right?

7:12the great thing is that it's easier than it's ever been and because we hardly any of us use cash anymore right genuinely only get cash from relatives on my birthday you know those those videos where it's like when you open the card and like loads of cash comes out from your grandparents but you've got to make a real point of reading the words merry christmas from nonna and michael oh thank you nonna there's no money in there there appears to be

7:46um it's easier than it's ever been because most of us are banking apps on our phone and many of them are really good at helping with this um now obviously i haven't used them all right because I generally bank with First Direct. They're not very good at it, but I also am a Monzo customer. And I think Monzo absolutely rule this stuff. There are some other really good sort of what we call challenger banks like Starling, there is another one as well, Revolut, I think. So there's some really good, these are like newer banks and they're app-based. Yeah, they don't have that I know of. They certainly don't have branches.

8:22No, exactly. Branches. So they, you know it's all built around the app but Monzo will allow you firstly to track spending it will automatically categorize and you can change the category so you know if you go for McDonald's or you buy sort of Sainsbury's or whatever it will say groceries or if you make it easy it'll say restaurants or eating out or something like that and you can adjust those categories and the app will learn right so if you change the category it should know next time okay last time I was at test because it was groceries um and so it's going to be groceries next time and using in monzo there's um functionality called trends whereas you can you can set your budget and it will track it for you so it will say cool i didn't know that you could do that yeah yeah so you can say okay i want to spend 400 pounds this month on food that can be quite visual as well you can see like oh okay i'm already halfway through and it'll notify you at different points because even if you I'm very much a very visual person so if I'm on week not even finished week 2 and I'm on 200 of my 400 pound food budget using your numbers I'd be like ah still got half left I'm fine but if I see I've gone over the halfway point on the wheel I'm like oh and Monzo quite often do the wheel pie chart kind of especially with pots anyway we'll get to that because pots is a way of kind of segmenting your money I want to put this much aside for this, for that, or whatever.

9:52So Monza, I think, just have nailed this. It's so user-friendly. Yeah, yeah, it's brilliant. So it's part of your budget. You plan what you're going to spend. We'll get to that a little bit more in a minute. And then Monza will help you track. There are third-party apps as well. So for years, I've used one called YNAB, Y-N-A-B. It stands for You Need a Budget, an American app. So with open banking, you can set it to bring in your transactions from your bank, and it will auto-categorize. And that will do broadly the same thing, but it is paid. Right, okay. Yeah, and Emma is another good one. Emma does essentially the same thing, there's different levels.

10:29And with a lot of these apps, you can get like cash back and there's different perks and stuff, right? So definitely have a look. We'll maybe put links to a couple in the show notes. So we'll go from that. With YNAB, when I was doing Meaningful Money research, pretty sure the first time you mentioned it was in episode 13. 13 video episode video episode 13 okay folks uh welcome back just a brief aside really something that i've discovered recently i found a piece of software called you need a budget or ynab y-n-a-b and we're now on 600 and something yeah so yeah i've been talking about why now for years i've been using it for i would say best part 20 years cool yeah it's brilliant but i don't use it to budget anymore.

11:15The great thing about budgeting is that if you do it well and consistently, you'll get to the point where you don't need to do it anymore. Right? Yeah, I suppose you can almost hold it in your head in some ways as well. Yeah, it just becomes second nature. And if you build a buffer for yourself, it's less critical. Yes. Okay, so speaking of buffers and some people's income varies very much month by month, you know, especially if you're on things like a zero hours contract. Yeah. Is it possible to still budget even if you're got, you know, irregular hours or not necessarily a set income each time.

11:47Yeah. It's possible. It's harder. Yeah. It's going to be, right? So going back to our wanky weather week and fixed and variable expenses, the thing we need to start with is our fixed expenses, the stuff we have to pay every month. Yeah. Else bad things are going to happen. Yeah. So if we've got debt repayments, that will be one of them. If we've got like rent or mortgage or whatever, then those things, they have to go out. Yeah. So we budget for those. we set that money aside, most of us, most, not all of us who have variable income have some, like a broad minimum. Yes. Right? So it's like, on a really bad month, it'll be X.

12:26Yeah. It's not going to be like one month, you do 60 hours a week and another week you do, another month you do two hours a week. It's not going to be that drastic. Well, and hope not. I mean, that's super difficult. Yeah. And that's how people get into massive financial difficulties, right? So obviously, if you've got variable income, it helps if you've got your own buffer, like some money set aside behind you so that you can smooth out those ups and downs a little bit. In order to get to that, you're going to have to be super tight on your budget and live like a monk for a little bit and essentially live to your minimum.

12:57And if you earn a bit more, you want to be socking that as much of that as you can away. So if you're sort of... That's a horrible, horrible phrase. Socking it away. Yeah. Is it? Why? I don't know. It just sounds weird to me. It's an oldie person phrase, I think. I am an old person. That's why I'm here. Yeah. I don't know about you guys. Did your mind go to the same place mine did? Oh, socks. Yeah. Okay. I'll try and avoid using socking as well. I think it's because you made it a verb. Socking. Like, if you sock it away, that's better than socking it away. No? Yeah, okay. You're my daughter. We're in a very, very weird territory.

13:36Okay. Yeah, right. Okay. If you have a minimum, live to your minimum, even if it's for just two or three months. Yes. In the grand scheme of your lifespan, that's not a long time. You're going to miss out on a few things. Yeah, exactly. And it will be hugely beneficial. You just say, I'm not going out. Honestly, I'm not going out. I'm going to eat beans on toast for three months. But if your minimum sort of that you get on an average month is a thousand quid a month. Yeah. On a half decent month, it's 1200. Not a really good month, it's 1500. You need to be able to live to the thousand. And try and get, the optimal is if you can get like one month of your worst kind of month, like a thousand quid in that example, if you can get that behind you, you really hold the drive.

14:19As your buffer. I see. So that then on the months that you, if you have a shocking month and it's 800, well, sorry, you've got a thousand quid behind you. Yeah, you can dip into a couple hundred quid. But then you'll need your budget to refill that. To refill it. Okay. Cool, so it is possible. It is possible, but we need to try and get a buffer behind us. Yeah. Now, something, I'm a bit flaky with things, like I start journals and I never finish them. How do I make sure that doesn't happen with my budget? How do I stick to it? Well, that's not just you. It's human nature, right? Most of us can be quite sort of faddy, so we might get really into something and then our enthusiasm wanes a bit.

15:02That is human nature, I think. so what we want to yeah so go easy on yourself so sticking to it is one thing often we feel like circumstances are against us it's like you decide you're going to go on a diet and then it's your mate's birthday and they want to go to Chinese yeah you know yeah I don't know you're like win a hamper well that's just great it's there I'm going to eat it I have to eat it I was given it exactly it'd be wrong to do otherwise so it does sometimes feel like the universe conspires against you to sort of derail your good intentions right so when things come up that threaten to derail you obviously some things are unexpected you talk about earlier on about car failing and MLT or whatever there are things that come up Christmas, birthdays, they are not unexpected we need to stop lying to ourselves Yeah, Christmas just around the corner.

16:02It's exactly the same day every single year, right? From 2 ,000? From many years ago. So, you know, we need to sort of be a little bit firm on ourselves and say, look, that wasn't expected. But life does start as something. So we need to get to a point where we've got a buffer, an emergency fund. Again, by spending less than we earn, it underpins almost everything. It's hard, but what we do for a few months is we say, I am going to build a buffer, an emergency fund, and X amount of my pounds, if I've got two grand coming in this month, I'm going to set aside 200 quid of that to build my buffer.

16:39And I put it away straight away the second I get paid and I leave it and I don't touch it. Where do you put it? If you're using something like Monzo, you can stick it in a pot. You can stick it in a separate account, which is the same thing in Monzo, essentially. If you don't have an account that has the sort of pots functionality, which are essentially virtual accounts, then you can physically open a separate account. What you want to do is make it, perhaps put some friction in place so that you don't spend it. So by having it in a completely different account, you'd have to get a different card.

17:09You'd have to physically move it back into your spending account in order to spend it. Yeah, that's true actually, you can't spend your pots unless it goes back into the main account. Into the main account, right, on Monzo. So you have to actively go, oh. Yeah, I was doing so well, but sometimes needs must. Sometimes it is needed, yeah, I've done it. there for right so you know you need we need to work towards building up an emergency fund a buffer we'll talk a bit more about that next week yeah and the week after probably because it it it puts a barrier between you and the world safety net yeah it is totally and it's really important um when it comes to saving up for stuff in the future that's called sinking funds or a lot of people use that phrase it simply means i know something's coming next year i've got like 10 months between now and then, I know what I'm going to need to spend then, so I'll divide it by 10 and save a little bit every month.

17:57If my car insurance is 500 quid and I'm 10 months away, it's good maths, 500 divided by 10 is 50 quid a month. Six pounds 72. But if you know what it's going to be, you can save for it. Yeah. But you need to be budgeting for that now. So we talked about this last time when you go into the, you look in your account and you go, I've got nothing. If I blow my budget halfway through the month, what am I going to do? It's obviously not a pattern, I want to continue, but I've got myself in this situation, what do I do? Yeah, you kind of need to take ownership of that because it hasn't happened by accident.

18:35I mean, if something's really, you know, something's really kicked off and there is a massive bill that you're totally weren't expecting, it's more than any buffer fund that you've been able to build up. It does happen occasionally, right? But it is more often than not. More often than not, it's loose control. Yeah. I hate to say it, there's no magic bullet here, Kate. You can't just sort of, okay, set in place some basic functions and it'll sort of look after itself. No, you have to hold yourself accountable. Yeah, exactly. But you mustn't beat yourself up. No, we are only human. Because that's a negative.

19:03Yeah, that's a negative sort of cycle to get into. So don't beat yourself up, but don't lie to yourself either. Don't say things, I'm just not going to stick into a budget. That's terrible mental language. And say, I can do this. I just made a mistake. I made a mistake. I'm human. It happens. But I can learn from it and not do it next time. Now, great, but I'm in the middle of the month and I've blown it. What do I do? You're going to need to go monk mode, probably. Beans on toast. We joke, but maybe. Yeah. It's either that or you get into debt, which you want to avoid if at all possible. Debt can help, but for a very short term.

19:42You don't want to be living in debt. No. Too many of us do that, and I did it for years. You live in your overdraft. You never get out of it. You're always owing somebody money. You're paying interest maybe. you don't want to live like that getting to the point honestly most people if they lost their job they couldn't make it a month without getting into debt right most people live paycheck to paycheck we're just saying majority of people yes I'm certain it's a majority I'm going to feel like I should have looked up some stats wow which is a properly precarious place that's terrifying but if you're halfway through the month and you're a lot skinner than you thought you should be at this point you're going to need to do everything you can and not to make the situation massively worse.

20:21Don't keep going as you were planning to. No, don't go. Sorry, I can't go on your birthday takeaway. I am sorry, but I cannot go. You might need to get used to pissing off your friends. I do also truly believe that if your friends are angry at you because you can't go to something because you can't afford it, and you're sticking up for yourself to not go, they are not your friends. Well, no, I totally agree, but... But this is the world we live in. It is, and it's not easy to stand up to other people. Especially your friends. So, look, go monk mode. go hard, go strong and just say, I'm going to do everything I can not to make the situation massively worse.

20:55Your future sample, thank you. Oh, yeah. And that's so often the case. A bit of control now will bring massive freedom later on. A couple of stats for you. Living Wage Foundation says 49 % of UK employees live paycheck to paycheck. Wow. To half. And that's so hard. It's hard to get out of that. Really hard. low paid workers 42 % of them have less than 10 pounds left after essentials terrifying that's awful yeah emergency savings nearly half of uk half 50 nearly half 59 % i think that's more than half 59 % of uk adults have less than 5 ,000 pounds in savings 13 % of uk adults have nothing at all 13 % have nothing but 59 % of less than five grand most of us wouldn't be able to live more than 3 to 4 months particularly not if we're paying rent, you would never make it that long 5 ,000 quid is not a lot of money these days is it?

21:50No, flip, wow that's terrifying. It is scary and so the most we can do to put a buffer between ourselves and the world really helps What do you know? Some little speedy stats there. Okay, so how strict do I have to be with it? How strict do I have to, can you know is there a leeway yeah or is that just a slippery slope i think we should budget to zero so that means give every pound that's coming in your income a job to do right if you leave it woolly you'll spend it i would yeah right so if you say okay right i've got two grand coming in i've budgeted 1500 you will blow the 500 yeah right you will blow it so budgeting to zero means giving every pound a job.

22:38Either, there's only three uses of money, right? Talked about this too. Right? You spend it now. Yeah. You save it and invest it so you can spend it later or you give it away. Give every pound a job. It's either paying bills, you're spending it now. Yeah. It's either fixed or variable expenses, wanky word of the week again, right? So, you want to set those up and then track, right? You can budget a buffer. That's okay. But put a number on it. Don't, there's a big difference between saying, I'm going to keep 200 pounds as my sort of buffer, my stretch amount, right? As opposed to I'm just going to kind of leave that open.

23:19What I would do is I would budget maybe to save that money and do everything I can to stick to the budget so that that 200 quid gets saved. But if it comes to it, you can say, well, actually, I need 75 quid of it. Yeah, right. But I would start by giving it a job and only fax if you absolutely need to. Okay, cool.

23:40Did you write this point? Yeah. Is that why you don't recognise it? This is why it's wanky. Is it? Budgeting power moves. Yes, that is wanky. What? Yes, I wrote it. I was like, no way did I put those words together. Do you want me to look at you with a straight face and go, Dad? Ask it how you want. What are some budgeting power moves? So in other words, how can you make this as easy as possible? That would seem a much nicer way of wording it. You had to say budgeting power moves. I did throw it together. Anyway. Look, automation is super powerful. It's weird. You kind of have to strike a balance between being intentional and keeping control and automating what you can.

24:23Automation is great because it takes decisions out of your head. Yes. And because many of our expenses are the same every month, we can make that super easy. so if your rent is I don't know give me a number 700 quid a month right then and it's the same every single month and you don't have to budget for 700 quid a month do you you just make sure that money's there yeah and your fixed expenses get paid first essentially so yeah if you add your rent your car insurance your mobile phone bill and all your fixed expenses together and that comes to say a thousand quid a month what you need to do is to make sure that that is there ready for those direct debits to go out yeah and so one thing that I've done and actually your mom taught me this.

25:00Right from the start, for as long as we've been married, it's nearly 30 years now, is we've had two bank accounts. We've had a bills account and a spending account. So the way we've always done it is we get paid into the bills account. We know that our bills are X amount a month. All we do is we leave that amount in that account and anything excess, we shift into a spending account. And that's the bit you need to budget because those are your variable expenses. Yeah, because you don't need to budget. If you're earning two grand and you know you're going to have to spend a grand. Yeah, so you keep a grand in your bills account, shift the other thousand quid to your spending account, and that's what your budget is.

25:33Right, I've got a thousand quid to spend. It kind of halves the amount of things you need to keep an eye on. Continue with your ninja moves. Do that the day you get paid. You can always do it a day or two after, because sometimes it gets a bit messy, back holidays or weekends or whatever. If you do it the day after, it's usually fine. And we said this last time, I think, but scheduling your bills if you can change them to be a couple days after you get paid. And that's done. Yeah. Right? But having the two account system, it doesn't really matter when they go out in the month because you know if you've left a thousand quid for bills in there, it'll just get whittled down.

26:04It'll be down to roughly zero. Give yourself a hundred quid or something. I look at that account and I don't really consider it my money. No, because it isn't. So I don't really look. You've contracted to pay it to other people. Yeah, so I don't look at it. No, right. Honestly, when you're starting out, it's like when I said, I wrote down every single penny for like a week. And it was a ballache. but probably quite eye-opening though exactly what I was going to say you're like man alive how much do I spend on just crap I don't need so sometimes it's worth just saying I will check this every day and I will make sure I'm sticking to the budget that I've set every single day and then as you get better at it you can do that once a week a week yeah and eventually you just have a quick check at the end of the month and say I didn't completely blow it this month so we're fine well you start to learn like if suddenly I'm having an amazing month in my life as in like wow I've suddenly got amazing shoes, I've had amazing food, you know, I'm thinking I'm going to run out of money.

26:57Well, yeah, potentially. You can track, oh, actually, no, my behaviours have stayed the same. I'm going to be all right. Yeah. Once you're experiencing budgeting, I mean. Yes, that's right. And sort of worst, a monthly check, particularly if you've got a decent buffer behind you. Yeah. Perfection is when you can get to the point where you're spending last month's money, not this month's. So in other words, you have one month worth of spending behind you. If your total spending in a month is 2 ,000 quid and you earn 2 ,000 quid, right? So you're spending everything that's coming in. Wouldn't it be great if you had 2 ,000 quid on the last day before you get paid?