From Zero To Hero
I took this picture in Regent’s Park in early November 2017 when I was out for an early morning run. Even in the centre of one of the most expensive cities in the world, some of the nicest things are free.
Is there a different way to approach your spending?
Some money gurus – such as Ramit Sethi in the US and Rob Moore in the UK – make a lot of the importance of people increasing their income to fund their desired lifestyle, and not feeling guilty for that spending.
The idea that you can spend what you want and just find ways to increase your income to fund it sounds very appealing, when compared to the alternative of controlling your spending and making sure that that spending is less than your income. The problem is that for many people this approach is unlikely to lay the necessary good financial foundations. By all means look for ways to maximise your income, as I explained in this post, but it is unlikely to be enough.
Few people find appealing the prospect of adopting a disciplined approach to their day to day spending - and the pain of the necessary immediate sacrifices - in return for benefits in a distant and unfamiliar future.
Wherever you are in your money journey and whatever your level of financial independence the reality is that your financial wellbeing will almost certainly need you to get control of your day to day spending if you want to get and stay ahead financially.
Most people know how important it is to control their spending and have some form of budget. The problem is that even if they have a budget, few people stick to it. It seems that, while we all have good intentions, we are mostly setting ourselves up to fail. If you keep failing at something – in this case sticking to your budget – you’re more likely to lose confidence in your capability and give up trying.
But there is one idea that might help you refresh and improve your approach to controlling your spending.
Zero Based Budgeting
A business accounting concept called zero-based budgeting (ZBB) can be adopted for managing your personal finances. Unlike traditional budgeting, which starts with existing core expenses and then adding inflation and new desired spending, ZBB starts with a budget of zero. That’s right, Zero. Zilch, Null, Nadir!
Any old and any new spending needs to be justified before being added to the budget. The onus is on you to justify all spending in the light of your personal values, lifestyle needs and desires and other objectives.
The key point with ZBB is that EVERY item of spending needs to earn its right to get into the spending budget. Spending on things like housing and transport are clearly essentials, but ZBB causes you to look carefully at whether that spending can be optimised. And in the case of non-essentials, whether you should add it back in.
And you need to start the process of creating a ZBB now, in order to start the new year in good shape. January will be too late.
Cull The Payments
First look at all your regular standing orders and direct debits and either just cancel any that won’t affect your credit score and retain but highlight those that you can’t stop paying.
So, rent, mortgage or loan agreements need to be maintained and then carefully reviewed. Everything else can be stopped. This will cause the supplier to contact you asking for you to restart the payments. This is your cue to ask yourself - do I need this spending and, if I do, could I buy it more cheaply?
Can you get a cheaper mortgage deal? Should you buy rather than rent? Could you move to a cheaper rental property? Do you really need that flash car on expensive finance? Could you save money by buying an annual season ticket? Could you move that expensive overdraft to a low interest repayment loan or zero interest balance transfer? Do you really need Sky, Now TV, Amazon Prime and Netflix or would one do? Do you need that smart phone insurance policy, or could you add it to your home contents policy?
The key point with ZBB is that it makes you confront lifestyle creep (the tendency for living costs to rise in line with increases in income) and the spending inertia that inevitably affects all of us over time.
So, start with ZBB and start now. Once you’ve done that you can then look at maximising your income, safe in the knowledge that it won’t disappear down a spending black hole. That’ll enable you to look forward to worrying less about money in 2020 and being good to your present and future selves.
Warm regards,
Jason
PS Check out my earlier blog - How to get control of ALL your day to day spending - for more ideas on controlling your spending.