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Budgeting that works: The Money Principle Way

When I needed a budgeting framework that is easy to apply and does not constrain me within a budget I used Arkad’s rules. This worked really well for two reasons. One, I could automate the negative wealth repayment and get on with my life instead of obsessing over it all the time. As a result my quality of life improved, my work improved and my work results improved. This will soon pay off, I believe, in career and financial terms. Two, we built an emergency fund and started building savings/investments. This made me feel less fearful about the future and, let us face it, less vulnerable to any adverse future developments. So, Arkad’s budgeting was good for quite some time.

Several months ago I noticed that we spend hardly anything on fun and on ourselves. This wasn’t because there was nothing left to spend but because of the way in which we budgeted: fun was not in our budgeting frame. Having realised this, and the detrimental effects it has on family life and individual feeling of worth, I started playing around with the budgeting frame. After all this is one of the advantages of budgeting: if it doesn’t work you look at it and re-work it rather than feeling as a complete failure.

The Money Principle budgeting guidelines are the following:

Start a ‘millionaire account’. In this account we put a minimum of 10% of our monthly net income and this money is not touched except for investments. We used this account last to pay the fee for a course which counts as an investment – learning things that can get you to a different earning level should do. This account will not necessarily make you a millionaire but it will certainly open opportunities and contribute to secure future.

Create an ‘emergency fund’. People reading personal finance books written by Americans please pay attention: you are very unlikely to need an emergency fund of six months’ salary; you are not likely to need one that is three months’ salary either. Our American colleagues recommend this level because of different employment regulation – in the UK and most European countries the emergency that requires you to survive for six months without income is redundancy and in such cases most people will get redundancy payment. If, however, you are self employed you need at least three months’ worth in your ‘emergency fund’. Everybody else needs no more than £1,000 for unforeseen or accidental expenditure.

Start an ‘I am so worth it’ fund. This is the main difference between the other guidelines and the Money Principle ones. Whatever your financial goals are you need a life, you need fun and enjoyment. We currently put about 5% of our net monthly income in our ‘I am so worth it account’ and although this is not much it has made enormous difference to our lives. We can, for example, go to the theatre and not feel guilty about it. It doesn’t matter how much or how little you put in this fund – just do and see the difference.

All else come out of our current account which balances every month – I make sure of it!

2 thoughts on “Budgeting that works: The Money Principle Way”

  1. Good principles, but I’d be more cautious on the emergency fund. Statutory redundancy is not particularly generous, and more and more companies are cutting back on enhanced provisions. The same goes for maternity and sick leave. Overpaying your mortgage is a good way of addressing both the emergency fund and millionaire fund… It is investing, but also means you can take a mortgage holiday if things get tough, to you decide to take a full year’s maternity leave … And right now, if you’re on variable rate it’s pretty cheap to overpay, probably a better investment than savings.

  2. Valid points, Victoria. And I did say that people should adjust the proportions according to their situation. What I find interesting is that people who have loads of ‘negative wealth’ are building six months expenses emergency fund. And although I agree that the statutory redundancy is not generous it still in most cases can cover between three and six months living expenses (basic expenses should be considerably less than earning anyway).

    I would disagree on the mortgage. My position on this one is that although it should be paid off this is after building serious cushion fund and investments. But this is another conversation.


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