The end of June saw the third quarterly review of our monthly budget. So far (six months in) the budget has worked well. We’ve kept to the agreed debt repayments every month, managed to put some money into the savings account each month, and lived within our means.
More recently we’d started to notice that spending on ‘incidentals’ had increased, and this wasn’t really being managed i.e. we didn’t know how much we were spending. The ‘incidentals’ included things like coffee, and sandwiches, and books, and train tickets etc. (odds and sods really).We were also struggling to stay within our own personal budgets, and the food shopping budget was proving to be very tight.
Luckily the existing budget did contain some wriggle room, and so we were still able to live within our means. However, as part of this review we decided to shake things up a bit and increase our personal budgets (and the food budget).
We are in a really fortunate position in that Amy’s job is safe (for the time being) and so the additional income that she brings in really helps. This has allowed us to increase our personal budgets, to increase the food budget, and to maintain the debt repayments, whilst saving some money each month.
This time round we’ve budgeted to save a specific amount each month. Previously we’d simply saved anything left in the bank account at the end of the month (above and beyond the buffer). This worked at the start (the amounts varied) but from now on we’re aiming to save £500 a month.
The savings vs. debt repayments dilemma
We often discuss whether it would be better to use the money going into the savings account to pay down the debt faster. We’ve decided not to do this, and to consciously save £500 a month.
The reason for this is that savings provide much needed flexibility.
The credit card debt is now all on one interest free card, and will be paid (at current repayment rates) before the interest on the card kicks back in. Although paying off this debt early, by using the money that we are saving, would free us sooner (and would be awesome) it doesn’t allow for any ‘shocks’. What I mean by that is if I and/or Amy were to lose our jobs, or if a major unavoidable expense came up, we simply wouldn’t have the flexibility to deal with it. Savings provide that flexibility.
At present we have enough saved to get us through a month, and that will increase over time. This gives us peace of mind in that whatever happens we will be able to cope (financially). Of course at some point in the future we may even decide to use some of our savings to pay the final part of the debt off early, but for now we are saving.
Now, on to a concept that we’ve introduced into this quarter’s budget: guilt-free spending.
As I indicated earlier we’d noticed that we were spending on what I call ‘incidentals’ and that this spending had started to increase, and wasn’t really being managed. ‘Incidentals’ covers a whole host of things from buying lunch, to purchasing books or music. It’s low level spending (generally less that £50) not covered off in the budget, but low level spending that adds up.
Our existing budget could cope with this however what we hadn’t factored in was how we’d feel about this spending. Having lived hand to mouth for over a year, and having put a fairly strict budget regime in place both Amy and I realised that when we did spend money on ‘incidentals’ we felt guilty.
That’s why we’ve decided to increase our personal budgets (significantly) and introduce the concept of guilt-free spending.
The way this works is that we both have a personal budget for each week. That money has to cover everything from travel expenses (work) to dry cleaning to haircuts. The money is ours to spend as we see fit, but is there primarily to cover off the basics.
Anything that we have left each week/month can then either be used to save up for something that one of us wants or spent. The key is that the money is ours (individually), can be spent on anything, and that neither one of us will judge the other on what they spend the money on. The money can be spent guilt-free.
This means that if I so choose I can spend my entire excess budget on philosophy books (my latest interest) or I can save up for a new camera, or I can eat out during the week: all guilt-free.
This journey towards becoming debt-free has been paved with so many lessons. At the start of the process I was over-whelmed with debt, had no plans and no budget. Eighteen months later there is a plan and a budget, the debts have reduced significantly and will be paid in less than a year, we have a savings account and savings, and there is some money floating around for guilt-free spending.
I’d be really interested in hearing your thoughts on guilt-free spending. Is this something you have incorporated into your budget? Does it work for you?
Answers on a postcard in the comments box below.