The new household budgeting technique that’s totally changed my life and made me feel like I’m not really ‘paying’ for anything, by Rachel Rickard Straus
For the last four months, all of my household bills, groceries, holidays and even meals out have felt as if they were free. That’s not because I have won the lottery or have a new benefactor – in fact I’ve had no change to my finances at all.
What is different is that in September last year I started a new budgeting technique. Until then I had managed money in the same way for years. I had all my direct debits set up so that my bills would come out on payday.
At the same time, I would shift any money that I didn’t want to spend – and felt I should be able to do without – into a savings account where I wouldn’t be tempted to touch it. Out of sight, out of mind.
Then, whatever was left in my current account I’d be free to spend. I didn’t track it too heavily because my thinking was that if I was saving enough and covering my bills it didn’t matter.
But all that changed when, towards the end of summer, I married James – a budgeter.
My husband swears by a ‘pots’ technique for managing his money. He decides how much he wants to set aside for different types of spending, such as groceries, household bills and petrol.
At the beginning of the month, he splits his pay cheque accordingly into pots designated for each type. He has a bank account that allows you to automate this process, so that when your salary hits your account it flies off into your different pots you’ve specified.
He also has pots for longer-term spending, such as one for holidays and another to save up for a new car for when ours eventually conks out. Then, when he spends throughout the month, he takes the money from the relevant pot.
Rachel and her husband James, who has transformed their newlywed finances with his budgeting technique
He has been doing this successfully for years to manage a tight budget – first using pen and paper and then switching to automation when the technology came along.
When we combined our finances after the wedding, I agreed to try out his budgeting method. Now we both put into the pots when we get paid and both spend from them as well. We also keep a sum aside each month for our own expenses.
It’s too early to say whether this technique has improved my spending habits or made it easier to save money. Certainly I now have more oversight over where money is going and that will make it easier to see where we can cut back when we need to. I think I need to give it a year to see how it plays out. However, there have already been several, unexpected benefits. The most surprising is that everything feels free – well nearly.
Of course, between us we do pay for everything. But because we do so in advance by assigning the money on payday, by the time we actually purchase something it feels like it has already been paid for.
So, for example, when we bought train tickets neither of us saw the money disappearing out of our current accounts because we paid for them out of the ‘holiday’ pot. And it took the sting out of an unexpected £300 bill to fix the clutch on our car last month when we could pay for it out of the ‘car maintenance’ kitty.
Behavioural 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 pain of paying from the item you’ve purchased. For example, if you pay for a holiday in advance, it hurts at the moment you submit your card details and the money disappears from your account.
But by the time you go on holiday weeks or months later, that payment is a distant memory and the pleasure of the trip is untainted by it. Pay at the end of, or after, the holiday and it hangs over you the whole getaway – and is 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 London’s Royal Opera House in November. We have one pot labelled ‘fun’, which we use for the odd treat such as going out for lunch.
When the balance on this pot starts to rise, it’s a helpful reminder that we haven’t been out for a while. When that happened late last year, it prompted us to book those ballet tickets.
At this time of year, we are bombarded with ideas for financial new year’s resolutions and strategies for getting money into shape – and more often than not they start with some kind of new convoluted budgeting technique.
Behavioural economists have identified the phenomenon of the pain of paying – but there are ways to reduce it
I often wonder: who actually does these things. We may know that a new way of budgeting could be beneficial, but when you’ve managed your money in one way for a long time it can be hard to break the habit. We may not even realise we have a particular style because we’ve done it for so long we don’t even notice it.
Well, last year I did it – and so far, so good. If you’re looking at your new year bank balance – or actively avoiding doing so – and considering a change in strategy, I’d recommend giving it a go. And leaving it up for review – you can always revert or tweak it if it doesn’t suit you.
There’s a third unexpected benefit – I know whether to buy groceries on my way home from work. When one of us spends from our joint account, we both get an instant notification on our phone showing the amount and which pot it was taken from. I regularly see a couple of pounds disappear from the groceries pot and think: ‘Phew, he’s 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 all over again and rise a further 23 per cent in 2024.
The FTSE 100 rose a respectable 5.6 per cent last year – but that looks small fry against the gargantuan gains in the US.
Can the US do it again? You’d think that such a winning streak couldn’t continue – but then you might have thought that a year ago and it did. I usually console myself that I don’t need the 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 the winners and losers.
However, this year I’m getting a bit anxious. Such is the size of the seven biggest companies listed in the US – known as the Magnificent Seven – that they make up close to a fifth of the value of all the large and medium-sized companies listed across the globe in developed and emerging markets.
If one of them took a dip it could really dent even a fully balanced portfolio that simply tracks the value of all global stock exchanges. I wonder if this is a year to make some active decisions, so I am less beholden to these enormous US companies – or hope for another gravity-defying year.
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