Who sat you down and told you what to do with your monthly salary? Would that be no-one? Yes, we thought so. We were in the same boat. And as a pair of frugal-ish young professionals living in the big city, managing money carefully is really important to us. Especially because one day, before we’re both senile, we’d like to be able to buy our own house… Thankfully, P is the resident financial nerd in this partnership, and she’s come up with her five functional fun fund fundamentals to establish some solid principles for managing your money a bit better. This might seem laborious or unnecessary (the alliteration certainly was) but ultimately these are just five ways of thinking about your money and how you’d like to use it - now and in the future. Having that level of understanding and forward planning means you’re likely to do better with it.
One: Your Emergency Fund
This is priority number one, the fund that steps in when you have to call that emergency plumber, when your bike is stolen or your handsome cat needs a surgery. You will need access to this, but you don’t generally know when, and that £1,000+ is unlikely to be in your easiest access accounts. If your credit is good enough, your credit card should allow you to cover the sudden potential budget buster, while you take a day or two to get your hands on your emergency fund. A high interest cash savings account is the classic location for your emergency fund and it should typically cover 3-6 months expenses. So set up that account and start paying into it a little at a time. Once you have that amount secured, you are one potential worry down - it won’t be earning huge amounts of interest, but it will save you stress and give you a cushion against the unexpected, even if you don’t have a credit card to hand.
Two: Your Savings
This is the second stop on your salary sorting session. We are big fans of the ‘Pay Yourself First’ method, which means you take your desired minimum savings amount out of your bank the day that you’re paid. You never see that money, future-you gets all the benefits. You also psychologically adapt to working with 90/80/70% or less of your salary, which is healthy. How much you set aside monthly for savings is up to you and your goals, but we highly recommend 20% at a minimum. Consistently putting that away, month after month, accumulates and gives you a financial shield. It gives you options, protection in the future.
So, so many people are set to be caught out and in financial hardship later in life because of a lack of savings and far from everyone is blameless in this. The earlier you begin saving up, solidifying the habit, building your savings nest egg, the less of your wage you need to put in to ensure you have enough. Where you store it, ideally in tax sheltered investments that provide a great return over the long term in which it will benefit from compound interest, is up to you, but this fund needs to be set aside for long term benefit.
Three: Your Budget
Thirdly, your actual day to day spending. Your phone bill, weekly shop, gym membership etc - this is part of your budget and you need a good understanding of what it is, as understanding your average budget is the basis of your planning for your financial future. We go a tiny bit further though, because our budget has two buddies, two branches off from it that make the budget planning more reliable.
Four: Your Budget Buffer
It would be excellent to know that your average spending was £900 per month. It obviously will fluctuate, but how much fluctuation is tolerable? If you’re like me, you want as little variance as possible, to increase the accuracy of your predictions. To achieve this, I set aside a small buffer to the budget, something that can carry over. E.g. If I aim to spend £800 per month, and spend £650 in July but £1000 in August, I have a higher degree of uncertainty. If I carry over the £150 I didn’t spend in July to August, then I spent £800 plus the £150 buffer and end up only going £50 over budget.
The buffer should endlessly accumulate, but a set amount each month can help ride out monthly variance. Obviously the buffer is something you adjust as you go and get a better idea of your spending habits, both your strengths and weaknesses.
Five: Your Fun Fund
Lastly, your fun fund. After all of the above, I should reassure you that we do have fun here at Havenwards. Try as we might, Christmas, birthdays and holidays would bust through any budget buffer and look like massive overspend, even if it’s predictable. However, you can level this out with a fun fund. In our case, we put aside £10 a week each and that builds up fast. Then, when we’re about to go on holiday, or about to enter pre-Christmas madness, we take this extra spending from there, leaving the regular spend in its regular range.
When it’s the end of the month and the accounts are low, if a fun opportunity arises we can use the fun fund without worrying - this is always a joint decision, which makes us assess if we really want to spend that cash. Often, quite honestly, we don’t - which just means there’s a bit more in the jar for next time. And we do literally mean a jar - once a week we do the old fashioned thing and get out actual money from a cash machine to stash in our fun fund. The physical act of both putting the money away and (more rarely) getting it back out again helps us both feel more connected to what we’re spending and saving.
We hope you found this helpful - these aren’t hard and fast rules or commandments, but just a few thoughts on what we’ve found helpful. Some of this stuff we’ve really only recently got the hang of, and some of it we’re still working on. What do you think? What are your favourite money management tools or tips?