Strategy to Execute your Budget

Creating a budget is the first step to being more in control of your finances. Following the strategy to execute your budget is the next step and is the key to putting you in the drivers seat of your financial future. It will help transform your relationship with money.

"IF WE COMMAND OUR WEALTH, WE SHALL BE RICH AND FREE. IF OUR WEALTH COMMANDS US, WE ARE POOR INDEED." - EDMUND BURKE

You will need 2 bank accounts to follow the strategy. Your 2nd bank account will need the ability to create separate money pots that we will come on to later. I personally use Monzo, but most of the other "challenger banks" will allow you to do this such as Starling.

The 1st bank account that your income is paid into will be used to pay for your fixed costs and invest your money. The money for your fixed costs will simply be drawn down from that account and you won't have to even worry about whether you will meet them or not as a result.

You will transfer the money intended for your needs and wants to your 2nd bank account account at the start of the month. The exact amount to transfer to your 2nd bank account is the amount stated at the top of your budget you would have created in the previous step which is the sum of your "Needs & Wants", which is stated at the top of the spreadsheet (£730 in this case).

If you are yet to create a budget then you can revisit my post on how to create a budget by clicking here.

As mentioned above bank account 1 which you receive your income into will be used to pay for your fixed costs and invest your money. You will not use this bank account for any day to day spending. I will now walk you through the strategy to use to follow your budget.

Invest

To divert money to any investments you hold you should set up a regular payment to them shortly after you are paid. For example, if you are paid on the last working day of the month, you should set up payments to any investments to come out on the 1st of every month. By doing this you will ensure that you invest money immediately from your paycheck, rather than waiting till the end of the month to see what money you have left over to invest.

"DO NOT SAVE WHAT IS LEFT AFTER SPENDING, BUT SPEND WHAT IS LEFT AFTER SAVING" - Warren Buffet

Needs & Wants

The amount of money to spend on your needs and wants is shown at the top of the spreadsheet. This is the amount that you should transfer to your 2nd bank account (£730 in this case). As mentioned earlier, it is essential that your 2nd bank account has the ability to create money pots. If you don't have a bank account that can do this then I would recommend setting up an account with Monzo (which I use myself).

Pots allows you to separate out your money from your main balance. You can see the pots I use myself to the right.

This helps you to understand throughout the month how much money you actually have to spend on certain things such as "Experiences".

This helps to raise your awareness of what you can and can't afford throughout the month as you draw down from these pots.

I would recommend setting up pots for the majority of things you plan to spend your money on besides money you need readily available for things such as food and transport costs. This is so that you don't spend time faffing around in Tesco's withdrawing money from a pot to pay.

In the budget above there has been £124 allocated to spend on experiences. By creating a pot called "Experiences" you can move £124 to this pot. You can either manually add the money to the pot at the start of the month or set up a scheduled transaction to the pot each month.

It is worth noting that if you want to pay for something using money from a pot, you must withdraw the money from the pot first. This is because you cannot directly pay for things if the money is in a pot. In the case of money allocated to experiences, before going out to eat for a meal with friends you can withdraw the money from the pot that you expect to spend, to use to pay for your meal.

Having money in pots and withdrawing from them to use the money for its intended use is helpful in keeping you updated throughout the month as to how much money you have left to spend on the various areas you have allocated your money to from your budget.

Money pots also ensure that when some of your yearly expenses come around, such as car insurance for example, you have the money there to pay for it. This is because you can set up regular contributions to pots. Let's say your car insurance is roughly £420 and is due a year from now. You can set up a pot called "Car Insurance" with a monthly contribution of £35 at the beginning of each month. When your car insurance is actually due you will have the money available set aside in your pot to pay for it.

Summary

If you only had one bank account with no strategy in place, it can be almost impossible to understand how much money you can afford to invest whilst spending money on the things you need and want. Following this strategy allows you to take control of managing your money and shaping your future for the better.

Budgeting your money is not something you are going to be great at overnight. It takes time and patience, but following this strategy will help raise your financial awareness of the decisions you make with your money throughout the month. It should also make you more financially disciplined because of the reason that soon after you are paid you divert money to your savings and investments. This then gives you a smaller pot of money to use for your monthly expenses.

The next step in becoming better at budgeting your money is to track your spending and then review your budget. Click here to review my blog post on how to do this.