How to spend smarter — however wealthy you are

Each week I host financial wellbeing webinars for employees of UK organisations, where I answer money-related questions. Recently, more people are asking how to cope with rises in the cost of living.

Rising prices will put severe financial strain on many lower-income households. But in the first 18 months of the pandemic, some households saw their finances improve, with non-mortgage debt falling, savings increasing and fewer opportunities to spend.

During this period, many people I spoke to were surprised to find how much money they could save (or not borrow) when they could only spend on life’s essentials. As pandemic restrictions end and living costs rise, it is worth considering more ways to control spending — by choice rather than necessity. 

In my online sessions, I run polls to give me insights into how people manage their finances and to help attendees see how they compare with others. One of the most revealing questions is “How do you manage your day-to-day spending?”. It turns out the majority of attendees have no real plan for spending their money on a daily basis. 

The human brain is wired to favour short-term rewards, which invariably leads to short-term thinking and spending. And the fact that few schools or parents teach personal budgeting skills to children and young people means it’s no surprise that many people end up living from payday to payday, have little or no savings and accumulate expensive consumer debt. Learning to manage daily spending is seen as an optional extra, despite having such a profound impact on personal wellbeing.

Controlling spending is not just a skill for low or average earners. Many years ago, when I worked as a personal financial planner, I had to stress to one client with a £10mn portfolio that he would eventually go broke if he didn’t rein in his extravagant lifestyle. If you can’t manage your expenditure you’ll never build financial resilience, no matter how much you earn. 

High earners also need to learn budgeting skills to support their estate planning. If you spend less than your income, you can gift that income away with confidence. Such gifts fall out of your estate immediately for inheritance tax purposes, providing you can produce evidence that they don’t adversely affect your standard of living.

Yet some personality types will actively resist controlling their spending because it can seem like a reduction in their sense of control and freedom. Others might feel it will expose an addiction or other wasteful spending. 

Others think budgeting would cause conflicts with their partner. But a significant reason why many resist learning to control spending is that they would rather bumble along, react to events and indulge consumerist impulses than grab the budgeting bull by the horns.

In practice, I advise people to avoid the word “budget” because, for many, it can seem too much like hard work. Instead, I teach people to develop a Smart Spending Plan, which involves deciding where you want your money to go before receiving it, based on three types of spending: essential, future and fun.

As income comes in, it needs to be partitioned into different accounts to create some structure and make it easy to see how much is available for the various spending priorities. Here are my top tips for being a smart spender:

1 Get to the truth of where your money goes

Look at your bank statements over the past six months to gain clarity on your spending, including irregular items like holidays, car servicing and house maintenance. Most people find a big difference between their perception and reality.

2 Decide where you want your money to go

You must work only with the money you have now, not future bonuses, pay rises or other anticipated income. Every pound needs to be allocated to a purpose. Money coming in must equal money going out.

3 Adopt the CEO approach to spending

CEO stands for “cut, earn and optimise”. It means cutting out unnecessary spending, such as unwanted subscriptions, insurance policies or cars funded on finance. It means earning more through overtime, or selling unwanted possessions online. And make sure you are getting any state benefits to which you are entitled. 

Finally, you need to optimise the essential spending you can’t cut. Make sure your mortgage is competitive, haggle with your insurance company and change your mobile phone to a cheaper SIM-only deal.

4 Aim for progress, not perfection

Your spending plan is not a straitjacket, and things won’t go according to plan. But keep your focus on the progress you make, not the gap between your reality and your ideal.

The impending squeeze on incomes will be hard for some households to navigate. But difficult times often cause us to face up to things we have been putting off. And as my experience shows, many people have been putting off getting to grips with their daily spending. Now is the time to put that right. 

Jason Butler is an expert on financial wellbeing and presenter of the “Real Money Stories” podcast. Twitter: @jbthewealthman