REPOST: Spend less, save more: making a spending plan

This post was originally published in June 2013, the first in an intended series about money and spending. I still have those posts in draft, and I fully intend to publish them. Thus, this repost serves as a refresher.

Back in 2010, I started paying back my debt with a vengeance and it became a pretty substantial blog project for me. I wrote up a bunch of interviews with people who I thought dealt with money well (Nat, Lizzie, Lake) and a series of posts about how I was dealing creatively with not spending so much. I think 'money' is probably one of the most used tags on this blog.

While I'm not blogging about it as much, spending less money and being out of debt/saving myself some dollars is still very much part of what I do on a day to day basis (witness: savings tower). I am nauseatingly proud of this and should not be engaged in conversation on this topic. Just ask anyone.

Having refined my savingsy/frugally ways over the years, and boring the pants off of everyone I know, I thought it was timely to revisit some of the most helpful things I've found to do to spend less and save more. I hope that someone else finds this useful - I know that in the beginning stages, reading blog posts about people in the same situation as myself was incredibly helpful and kept me on the straight and narrow.

I'd initially planned this as a single blog post, but realised that I had so much that I'd learnt and wanted to share into the ether that it made more sense to make it a series.

Thus, the first logical step:

Get your foundations sorted: work out a budget.

The concept of budgeting has such a stink of deprivation around it that most people are disinclined to look into their budget until they're absolutely at the end of their financial tether. I know I was.

Because I'm now saving, rather than paying off debt, it's something I rather enjoy these days (how horribly smug of me). I like to think about it as my spending plan, rather than my budget.

The questions you're trying to answer with your budget are: Where is my money going? How much do I owe? How much do I want to save?

1. Where is it going?

It's super hard to work out a budget without knowing how you're spending your money already.

There are a couple of ways that you can collect data about what you're spending your money on. The most straightforward way is to collect receipts and enter your daily spend into a notebook or spreadsheet, categorising each transaction as you go. Alternatively, you can use some kind of software or app that will pull information from your bank account and put it into categories based on your definitions (you can use something like Kiwibank's Heaps or, if you have access to it, Mint). I've used both the receipt and electronic methods - and sometimes a combination of the two.

Even once your budget is sorted it's good to keep an eye on your spending, as it helps to see how you're tracking against your budget and if you need to work more on the plan that you've nominated. It's not always easy to keep up, but it is worthwhile.

At this point, you can also rationalise your spending. Work out what outgoings are fixed: bills, rent, food, transport costs. I don't do this now, but I used to include my ration for coffee in my weekly fixed costs (they now sit under 'fun'). It's up to you whether you want to do this, but be aware that it will affect any capacity for saving or paying back debt and sometimes considerably. For example, I drink soy flatwhites which cost $4.50 each a day. If I budget for my daily coffee, then I am budgeting for $31.50 each week or $63 a fortnight. Or $126 a month. (Eep). I'd rather spend that on my trip to Europe, thanks awfully!

2. How much do I owe?

Since you're looking carefully at your bank account and spending, you should also work out how much you owe - add together ALL your debts, even the little amounts.

Calculating your debt seems crazy scary, but finding out the worst is better than being hazy on your debts. I've found the reality is rarely a friendly number, but it's a matter of 'better the devil you know' when it comes to debt.

When I first worked out how much I owed, it was truly the first step in having a sense of ownership of my finances. It was also a rather large number.

3. How much do you want to save/at what rate do you want to pay off your debts?

You can work out the rest of your budget - what you'll save, how you'll pay off your debt, and what you can spend for fun - from this point.

I've been trying to save or pay back my debt at around $400-500 pw, so I'll nominate that amount to go into my savings and look at whatever is left over for fun money. If I didn't have an aim in mind, I don't think I would be saving at such a steep rate.

I believe you should be paying off your debt before you begin to save, as saving money at the same time as paying off debt is self-defeating. Interest rates on credit cards and overdrafts are really high and unless your savings are in something like a term deposit, the interest you're earning on your savings won't make up for the interest you're paying on your debts. I know that there are arguments to the contrary, but I'm yet to see a convincing one!

Lately I've been keeping aside around $200 for fun money - 'fun' includes things like haircuts, coffees, social evenings, clothing and knitting/sewing stuff. I also try to make it cover medical expenses, although it's nice to know the savings are there to cover in a pinch. If I know I have a big expense coming up, I'll adjust my other expenditure accordingly. For example, I'm planning to get my haircut this week and pick up a pair of boots from the repairer - so eating lunch and dinner out is off the agenda.

I know from past experience that I can have a totally acceptable social life on around $100 a week - and I'm planning to scale back to something closer to this for the next few weeks of saving before my trip. It's nice to know what my absolute minimum limit for fun spending is (while having a not-hermit existence), and that I can scale back to this at any time.

I was reading the comments on a Stuff article about budgeting a few weeks ago, and the general tenor seemed to be: "that advice is all very well, but not buying coffee doesn't save me much money or fix my immediate debt problem". The point is, you can't fix your debt immediately, it must be done incrementally. And the true cost of debt is time.

Finally, it's important to remember that budgets aren't static! Some weeks are simply more expensive than others, while others allow for more money to be put aside (I saved heaps when I was glangey). Be honest about what you're spending and re-examine your budget on a regular basis. It's basically a hobby of mine.

I will never get bored with talking about money, and how to save it. Do you have anything super helpful about budgets that I haven't covered here?

Next time: Cheers for all that. So, how the hell do I stick to this budget?