Money. An awkward topic. A contentious one too. And something we absolutely need to talk more about!
The current economic climate has put many people in a tough spot, so I want to provide some suggestions for navigating finances in the short and the long term.
If you’re reading this newsletter, chances are you work in data or tech and that you’re earning more than the average person. You may also have higher expenses, but there are still many smart steps you can take for a more secure financial future.
Let’s get started!
(Note: the below is not financial advice. It’s a collection of tools and approaches I use for my personal life, including why I use them. Before you make investment decisions, I recommend you do your own research to see what works for you. You’re always welcome to ask me directly if you questions about anything.)
1) Create a budget
The single best thing I did about 3.5 years ago before moving to the UK was to create a detailed budget.
I was worried because I knew London was going to be far more expensive than Nuremberg, Germany, and I wanted to continue putting money into savings and not live paycheque to paycheque.
To create a solid budget, all you need are:
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A spreadsheet
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A list of all your current expenses, including fixed costs (mortgage/rent, utilities, insurances, car payments, subscriptions etc.)
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A list with estimates of your variable expenses, including things like groceries, hobbies, donations etc.
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Your payslips, plus any other sources of income
Put all your incoming money and your outgoing money into this spreadsheet and see what’s left. This will be sobering, but clarity and honesty are really important when it comes to money. If you lie to yourself, it will come back to bite you.
Tip: Create a monthly, quarterly and annual budget.
I do this in three separate columns so I can see the numbers stack up.
Some costs are annual and budgeting at that level also gives you a really good idea of the total annual costs of certain hobbies and habits, e.g. if you get 3 takeaway coffees a week for $3.50/£3.50 each – that adds up to almost $550/£550 a year. Totally fine, but there is an opportunity cost involved – 550 could be used for a holiday for 2.
2) Save and invest
Saving and investing are important for a number of reasons:
Build an emergency fund.
This fund should (over time) be built to at least 3 months worth of total expenses. If you lose your job, if you need to replace your car, if you have other sudden expenses you can’t avoid… you need a backup plan that doesn’t force you into debt.
3 months should be the minimum. 6 months makes me sleep much better at night. I’m confident that within 6 months I’d find a new job and get back on my feet.
Invest in your financial future.
Don’t rely on your government pension alone. Even with a well-paying job, inflation and other factors will mean your future pension will probably not allow you to live comfortably and I’m sure you want to do more than just survive.
Ask yourself: how much money do you need each month to live comfortably when you’re retired?
I didn’t start investing until I was 35 years old, so I have a lot of catching up to do if I want my investments (ETFs + a special UK savings product) and my government pension to provide a decent lifestyle. Hence, I need to invest a fairly large chunk of my income each month and that already takes into account future inheritance and my ability to work beyond 67 years of age.
There are online calculators that help you figure out exactly what you need to invest today so that when you retire you can draw on $2,000/£2,000 per month after tax, just as an example.
Pay yourself first.
When you’ve figured out what you can and have to put away each month, it’s time to shift around the order in which you spend money.
Here is what I’ve been doing for years and it’s immensely helpful for building strong habits and seeing my account balances grow:
When my salary gets paid each month, I immediately allocate money to various ‘pots’:
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One pot takes care of rent and bills for our current place in London.
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One pot deals with my mortgage and bills for the property I purchased.
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One pot is for savings (that emergency fund, plus saving for other short-term purchases).
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One pot holds my savings for Christmas, which I build over the year so buying gifts doesn’t get stressful.
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And finally, there’s a pot for Maggie (our dog), for any unforeseen expenses.
I have set up direct debits for various bills which come straight out of these pots. Because I know how much money I need for housing, utilities, insurances, etc., I simply put the required amount in each pot and everything is automated.
Automated payments are also set up for my investments which go into the relevant portfolio accounts.
This also means: Whatever is left in my main spending account is money I can actually spend. Without regret, because I’ve taken care of all the essentials first.
I highly recommend saving and investing at the beginning of the month. If you “save what’s left”, you won’t save anything.
3) Inspect your spending habits
Oh I had to say it, didn’t I? Yes, this seems like the least fun part but I promise you: it can be really fun once you get into it!
You’ve done your budget and you know how much you’re spending every month. Assess where your money goes and which parts you’re happy or unhappy with. Then make some changes.
Here are my favourite ways to save money while still living comfortably:
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Shop second-hand. I buy my clothing second hand. You can buy good brands at a fraction of the cost. I used to spend more on clothing as a student than I do now and I’m glad I made this change. Things I personally don’t buy second hand: sports clothing (because I usually need something specific), underwear, shoes.
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Cook at home. I don’t spend money on takeaway food because I prefer my own cooking and it saves a ton of money. It’s easy to spend $10/£10 on a lunch when you go to the office. £10 can easily feed three of us for 2-3 dinners.
When I was little, my mum always made our school lunches and she once sat down with us to calculate how much money we saved by making our own food. Clearly, 30 years later, that lesson still sticks with me. -
Rethink holidays. I come from a country where holidays are expected and part of a collection of status symbols. As a family we never stayed in a hotel and never flew anywhere. It was always self-catered and we drove to our destination on our car. I am fortunate that I get to travel for work quite a bit, so when it comes to personal holidays, I prefer something low-key surrounded by nature.
I love the beach and spending a few nights in a nice hotel, but I am just as happy in the English countryside with much more money left in the bank and a lower carbon footprint. -
Dial back FOMO. When I couldn’t afford what others had, I was really jealous. Now I don’t even want those things anymore. If you notice that you’re buying things to impress others, and you’re ready to change this habit, you’ll see the benefit in your bank balance immediately.
4) Donate to help others
Eva, you just told me to save money and stop spending and now you’re telling me to give money away?
Yes, because it feels good, and because I believe we get back what we give.
I have picked 2 charities (just added a 3rd) which receive a monthly donation from me. I’m aware this is a ‘privilege’ but even if money feels tight, donating the cost of a cup of coffee each month can make a difference to the receiver and will help you feel good too.
I believe that what we send out comes back to us and I definitely feel like I benefit from making these donations.
So that’s it: my approach to money and to building a financial future that has me sleeping well at night. It’s really important to take care of this stuff.
I hope you found this useful.
I blogged about this topic a year ago, if you want to read more details: Financial independence — Eva Murray – Data & Tech Professional | Author
With that, have a great week and happy budgeting!
Eva