How I budget in 2022
- I have an emergency fund setup.
- As I am in the UK I don’t necessarily need health insurance. (Thank you NHS. Love you 3000.) I have a health insurance in India in case I need to for some reason.
- I have a term plan
Now that the base is setup I am free to invest. I treat my main current account as a business (even though I don’t run any businesses and just have salary as the source of income), i.e. credits should be equal to debits. You’ll understand as you read along…
In the UK, many banks offer sub-accounts called spaces/pots/accounts/etc within the main account. They come in quite handy. I will use the word account from now onwards and it could any of them or a separate bank account. It doesn’t matter.
Pre-requite:
- Know the fixed expenses like rent, fixed utilites (council tax, water, internet) and some non-fixed expenses like food, electricity.
Let’s take an example to make it clearer.
- Let’s say that my take home is £1000.
- Rent is £400
- Fixed utilites is £100
- Variable utilites is £100-150
- other expense (food, transport, etc.): £100
- investment: £100
- I have important expense coming up (buy gadget or vacation) so i will save for it: £50
- now £100 is left. this is extra.
This is what I do:
- get salary
- transfer a fixed amount to investments account
- transfer rent in the rent account
- transfer the fixed utilities in fixed utilities account
- transfer a worst case (highest case) amount in the variable utilites account
- transfer a fixed amount in the monthly expense account/leave it in the account
- transfer fixed value for upcoming planned expenses
- what is left is transferred in an extra account. this is for “wants” and spending in any way I want to.
- during the course of the month, I regularly transfer whatever I spend through credit card to a separate account for credit card from respective accounts. (I make sure to never spend more than 20% of my credit limit, I will manually make payments if it exceeds that)
- keep buffer in few of the above accounts so that the transaction goes through if there is a rise in the amount spent.
- a day before salary, whatever is left is also transferred to extra
- As you can see that I expend my entire salary. This is how I budget.
- I have direct debits and standing orders setup so that I don’t miss on any payments.
- Over time extra account will build up and I can spend it as I want (vacation) or invest the money.
- You can even do it with two or three accounts.
- You may not get it right in one go, but in a few iterations you will get it closer to the levels that helps you with day to day expenses, your future, and your luxuries. Don’t bother about getting it 100% right.
Simpler version:
- transfer investment money to investment account through Direct Debit/SIP
- one account for expenses
- one account for extra spending
- for planned expenses have a regular savings account (UK) or RD (IN)
- have a sizable buffer in your account so that you don’t run out of money.
You may also want to read this: How to keep your bank account safe
Disclaimer: I am not a financial advisor so whatever I say is not investment advice. Please see a financial advisor for financial advice.
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