You may have heard the expression ‘Look after the pennies and the pounds will look after themselves’, but it often comes as part of some trite advice on household budgeting from a (usually older) relative. However, many people struggle to manage a monthly budget, possibly overspending by many hundreds of pounds every month, and I freely admit to being one of those people. I find personal finance complicated, too complicated, and so I wanted to find a way to manage my money better. Specifically, could I achieve this by concentrating on the small, trivial, everyday spending, or in other words, by looking after the pennies?
Take the household income and deduct the essentials such as mortgage/rent, debt repayments, utility bills, insurance, food and transport. And while we’re here, let’s assume that all these outgoings have been reduced as far as possible by paring down and shopping around for the best deals. If they haven’t then do this now.
Whatever money is left over can then be used for some combination of the following:
- paying off debt
- personal spending
The rate at which debts should be reduced and/or savings increased is a very individual matter, but at the end of the day there needs to be something left for personal spending on those trivial, everyday things: a drink with a friend, a cinema ticket, a birthday card, grabbing some milk on the way home and so on – you know the sort of thing. It is these trivial spends that I want to focus on, the hypothesis being that by regulating these small amounts day in day out – by ‘looking after the pennies’ – I can make my overall budget work month in month out.
What this it not
This is not an exercise in household monthly budgeting. It is assumed that household income has been allocated so that all the important stuff is taken care of.
This is not the ‘envelope system’, which allocates cash into separate envelopes (literally) so that, for example, the money in the ‘groceries’ envelope is used for groceries, and only for groceries, and once it’s gone, it’s gone. For a more detailed explanation of this system, see here.
This is not prescriptive. I’ve read far too many articles and blogs by people who like to give advice but often without ever testing that advice first. I just have this idea. I don’t know whether it’s going to work for me, let alone whether it will work for you. I’m writing this at the very beginning, so let’s see what happens.
I like my privacy, but I want to assure you that I am a normal person: a husband and father of school-age children with a lower-middle income and a mortgage, bills and debts to pay. I think that qualifies me as an average Joe.
I was thinking about weight-loss diets and specifically those that use a calorie-counting, or points, system. The basic idea is that you have a number of calories that can be consumed (‘spent’) each day, and if you stay within this limit then you will lose weight. It’s quite obvious when you think about it: stick within your calorie ‘budget’ and everything will be fine. More interestingly, however, is that diets like this hopefully educate you about what you should be eating on a day-to-day basis. Once you get the hang of it, you can stop calling it a diet and get on with living your life, just being mindful of what you eat for most of the time and indulging yourself now and again.
It’s significant that these diets work using a daily calorie count. Can you imagine trying to manage a weekly or monthly calorie budget? So rather than having 2,000 calories a day, you have 14,000 for the week. Off you go! I know I would find that very difficult. Which is why it occurred to me that a daily cash budget might be a whole lot easier to manage than a weekly or monthly cash budget. I thought about it on and off for a few days and then decided that the only way to see if it would work would be to try it.
Set a trivial spending budget
How much you allow yourself for personal spending each month will depend on your income and financial commitments, as well as what you intend to use that money for. For example, it may or may not include petrol or bus fares.
I set my monthly personal spends at £120. This figure divides into 30 – the average number of days in a month – but also into 4 and 5, which may be useful later if and when we want to try a weekly cash budget. But let’s not run before we can walk!
So that’s £4 a day.
It doesn’t look like much, or does it? That’s the trouble: I really don’t know yet.
Until now I have been drawing cash from an ATM, usually £20 at a time, and when I’ve spent it I’ll draw some more as I need it. For the record, I’ve also tried drawing £30 and trying to make it last a week before I can have any more. It doesn’t work because I find it too hard to predict what I will need money for later in the week. So instead, starting at the beginning of the month (May 2018), I set aside the full £120 from which I took £20 and changed it into £2 coins (or £1 coins, it doesn’t matter). I keep that bag of £2 coins in a drawer and each morning I take £4 and put it in my pocket, along with whatever money is left over from the day before.
The next bit is pretty obvious, but since it’s the whole crux of the experiment, I feel I should spell it out anyway:
On day 1, I have £4.
On day 2, I have £4 plus what I didn’t spend on day 1.
On day 3, I have £4 plus what I didn’t spend on days 1 and 2.
On day 4, I have £4 plus what I didn’t spend on days 1, 2 and 3.
And so on.
On day 1, if I want to buy something for £5 then I can’t. This is really important. No ‘borrowing’ from future days, no ATM withdrawals and definitely no card payments. If it costs more than the money in my pocket, then I can’t have it. If I still want it tomorrow then I might be able to have it because I’ll have an extra £4 in my pocket, but not today.
I’ve been doing this for a week and so far so good. I’ve taken my children to the cinema, bought popcorn and lunch. I’ve not overspent and I have money in my pocket. It’s early days, but if I can carry on like this for the rest of the month then I will not spend any more than my £120 allocation, and that I will declare a success. Who knows, there may even be some left over…
Join me next time to see how this goes. If you have any comments on my method, including simplifications or embellishments, then add a reply below.