For the past four months, all my household bills, shopping, holidays, and even meals out have seemed free. That’s not because he won the lottery or because he has a new benefactor; In fact, I haven’t had any changes in my finances.
What’s different is that in September of last year I started a new budgeting technique. Until then I had been managing money in the same way for years. I had all my direct debits set up so that my invoices would go out on payday.
At the same time, I transferred money I didn’t want to spend (and felt like I could do without) to a savings account where I wouldn’t be tempted to touch it. Out of sight, out of mind.
Then, whatever was left in my checking account I could spend freely. I didn’t follow it too much because I thought that if I was saving enough and covering my bills, it didn’t matter.
But that all changed when, toward the end of the summer, I married James, a budgeter.
My husband relies on the pot technique to manage his money. He decides how much he wants to set aside for different types of expenses, such as food, household bills and gas.
At the beginning of the month, divide your paycheck into groups designated for each type. He has a bank account that allows him to automate this process, so that when his salary hits his account, it goes to the different funds that he has specified.
You also have funds for long-term expenses, like one for vacations and another to save for a new car for when ours finally breaks down. Then, as you spend throughout the month, you take money from the corresponding fund.
Rachel and her husband James, who has transformed their newlyweds’ finances with his budgeting technique
He’s been doing this successfully for years to manage a tight budget: first using pen and paper and then switching to automation when technology came along.
When we combined our finances after the wedding, I agreed to try her budgeting method. Now we both put into the pots when we get paid and we both spend from them too. We also save a sum each month for our own expenses.
It’s too early to say if this technique has improved my spending habits or made it easier to save money. I certainly now have more oversight over where the money goes and that will make it easier to see where we can cut when necessary. I think I need to give it a year to see how it develops. However, several unexpected benefits have already occurred. The most surprising thing is that everything seems free… well, almost.
Of course, between us we do pay for everything. But since we do it in advance by allocating the money on payday, when we actually buy something it seems like we have already paid for it.
So, for example, when we bought train tickets neither of us saw the money disappear from our checking accounts because we paid for them with the “vacation” fund. And it cost us an unexpected £300 to fix our car’s clutch last month when we were able to pay for it from the ‘car maintenance’ fund.
Behavioral economists have a theory for this phenomenon: it’s known as the pain of paying.
The idea is that when we spend it causes pain, but there are ways to reduce it. One is to pay in advance to disconnect the hassle of paying from the item you have purchased. For example, if you pay for a vacation in advance, it hurts the moment you submit your card details and the money disappears from your account.
But when you go on vacation, weeks or months later, that payment is a distant memory and the pleasure of the trip is not tainted by it. Pay at the end of the vacation or after it and it will loom over you throughout the getaway, and will be an unpleasant final memory associated with it.
The second benefit of our budgeting strategy is that we went to see a brilliant ballet production of Alice in Wonderland at the Royal Opera House in London in November. We have a pot labeled “fun,” which we use for a whim, like going out to lunch.
When this jackpot balance starts to rise, it’s a helpful reminder that we haven’t been away for a while. When that happened late last year, it prompted us to book those ballet tickets.
This time of year, we’re bombarded with ideas for New Year’s financial resolutions and strategies for getting money into shape, and more often than not they start with some kind of complicated new budgeting technique.
Behavioral economists have identified the phenomenon of pain to pay, but there are ways to reduce it.
I often wonder: who really does these things? We may know that a new way of budgeting could be beneficial, but when you’ve managed your money one way for a long time, it can be difficult to break the habit. We may not even realize that we have a particular style because we have been doing it for so long that we don’t even realize it.
Well, I did it last year and so far, so good. If you’re looking at your new year’s bank balance (or actively avoiding doing so) and considering a change in strategy, I recommend giving it a try. And leaving it for review, you can always revert or modify it if it doesn’t suit you.
There’s a third unexpected benefit: I know if I should pick up groceries on the way home from work. When one of us spends from our joint account, we both receive an instant notification on our phone showing the amount and what fund it was taken from. I regularly see a couple of kilos disappear from the shopping basket and think: ‘Ugh, he remembered to buy milk.’
Keep an eye on the Magnificent Seven
If there’s one thing I wouldn’t have predicted this time last year – after the US stock market had enjoyed a 24 per cent gain in 2023 – it’s that it would do it again and rise another 23 per cent in 2024.
The FTSE 100 rose a respectable 5.6 per cent last year, but that seems small compared to the mammoth gains in the US.
Can America do it again? You’d think a winning streak like that couldn’t continue, but maybe you would have thought that a year ago and it did. I usually comfort myself by thinking that I don’t need answers: I tend to invest in passive funds that simply buy the market rather than outperform it. That way I don’t need to bet on winners and losers.
However, this year I’m getting a little anxious. The size of the seven largest companies listed in the United States – known as the Magnificent Seven – is such that they represent about a fifth of the value of all large and medium-sized companies listed worldwide in developed and emerging markets.
If one of them were to fall, it could really affect even a fully balanced portfolio that simply follows the value of all the world’s stock markets. I wonder if this is a year to make some active decisions so that I am less beholden to these huge American companies or look forward to another gravity-defying year.
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