Here in the UK we are still agitated by Wednesday’s budget; well at least the press is. Last night I told you how writing about the Government’s budget made us realise that we have been underpaid on our child benefit for a very long time. Now, this may sound like good news – after all we are going to get a nice payment – but in fact it also made me think that although I ‘knew my numbers’ I did approach these wrongly. In this case, I approached wrongly a number referring to a very small income; we can do our finances considerable damage were we to act inappropriately with expenditure.
This made me think about how to manage expenditure and the different types of expenditure every household has. I find it helpful to think of three groups of expenditure: constant expenditure, negotiable (changeable) expenditure and variable expenditure. In fact, The Money Principle Budgeting Tool is build around these. But what do they mean for the way in which we manage our money?
This group of expenditure includes everything that you absolutely have to pay but negotiating the costs is either not possible at all or can be done only very occasionally. It consists of mortgage, secured loans, gas, electricity, water rates payments and taxes.
Since there is not much to be done about it, all spending in this group can be automated; while it is good practice to check your payments this can be done regularly but not very often.
This group includes all expenditure that is necessary but not vital (which means that it can be cut out in times of extreme crisis). More importantly all items in this group can be negotiated. These are all kinds of insurance, telephony, internet provision and medical and dental plans.
I would say that there are there key words that apply to this group of expenditure: check, research and act. Two years ago, we were able to shave considerable amount of our negotiable expenditure because we took the time to research house and car insurance, compare broadband deals and mobile phone contracts and shop around for life and health insurance. It can be a bit time consuming but it is well worth it.
This budget group is the largest and the most versatile one. It includes large variety of spending including food, drinks, entertainment, clothes and shoes, hobbies and holidays, services (e.g. cleaning, gardening), grooming and other obligations. Variable expenditure is where very quick gains can be made when tightening a budget is necessary. It is also:
1) the expenditure where distinguishing between needs and wants is important but not straight forward;
2) it can’t be automated and needs almost constant attention; and
3) managing it can be really time consuming and daunting process.
This is also the part of our spending where control and management depend on our habits, motivation and persistence rather than on our rational choices. Relying on ‘rational’ and informed choice in this category has been muted to lead to ‘decision fatigue’ and to ‘lock in’ into poverty mentality.
Automating constant expenditure, researching and comparing negotiable expenditure and developing sound habits regarding variable expenditure, I find, goes a long way towards achieving financial health and happiness. Oh, and if you fancy a look at TMP budgeting tool, it is under ‘tools’.
Have a nice weekend, my friends. And do you know what is tomorrow?
You will never guess but The Money Principle has its first birthday. More about this tomorrow!