This episode of the The Money Compass podcast was published on Wednesday 8th February 2023. You can listen again by heading to our episodes page, or on your favourite podcast player.
Episode Highlights
Emma and Lukas discuss the benefits of budgeting and guide you through how to plan your finances for the year ahead. They discuss help and guidance around how to make yourself a budget, how to stick to it, and some good things to look out for.
There are six steps to follow to get yourself off on the right foot with your budgeting in 2023:
1. See what money you have coming in. It could be on a weekly, monthly or quarterly basis. Make sure you include salary, benefits, investment income, passive income, rental income or anything else you expect to receive.
2. Work out what your outgoings are. Split your outgoings into two lists, one for essential spending and one for lifestyle spending.
3. Designate where your money is going. Try having a few bank accounts, one for your bills and essential spending, one for your lifestyle spending and one for day-to-day purchases.
4. Make sure your outgoing payments are scheduled for after you receive your income. Try to avoid transfers, standing orders and direct debits from going out before or on the day that you get paid to avoid accidental bank charges.
5. Plan in your savings. Set up a regular payment when your bills go out to put some money aside for saving. This way you will keep building your savings fund with regular payments.
6. Review your plan!
Rediscover the Conversation
Emma Knights
In our previous episode, we had a look back at 2022. It is important to now look forward at the year ahead, and all the different things that you can do to set yourself up for a good start financially. Today, we are going to start off with a little bit of help and guidance around how to make yourself a budget, how to stick to it, and some good things to look out for. Also, some other bits and pieces that will set you up and help you be financially savvy for the year ahead.
Lukas Spyrou
New year, new you, as they say.
Emma Knights
Don’t be conned into the gym membership because you will not stick to it.
Lukas Spyrou
Yes, it is a nice time for everyone. New start to the year, get yourself organized, and get yourself in a positive fresh start. We said we were going to start with some ideas for budgeting, Emma is that right?
Emma Knights
Yes, we have got six steps that we think are good ways to help you with your budgeting.
Lukas Spyrou
Six simple ways. I think this is the most important thing when putting together any sort of budgeting plan, the starting point is to have a look at your income.
I know a lot of people think they know exactly what they have got coming in, but it does no harm to just make a list of any money, or all the money that you anticipate you’re going to receive on a regular basis, whether that’s weekly, monthly or quarterly. That can include things such as your salary, if you’ve got any state benefits, any rental income, any passive income, or an income coming from any investment, or it could just be anything else entirely.
It is a really good idea to get it all down on paper and see what you’ve actually got coming in.
Emma Knights
That’s the first thing, know what you’ve got coming in. However, with any budget you need to know what you’ve got going out as well.
What we would tend to do is split your outgoings into two lists. One list of things that are essential, things that you need for day to day living; you need shelter, you need your rent or your mortgage, you need to heat your home as best as you can with the cost of heating and things at the moment and eating. They are all really important things therefore they would be on our essential list. Things that you need, possibly even your car might be on there because you need your car to be able to get to work every day.
Then we have a look at lifestyle spending, that can be a separate list. As I mentioned before about the gym membership that you are probably going to start in the new year and not stick to, that might be one of your lifestyle outgoings that actually is not essential, although it’s a nice thing to have if you can afford to do it.
Lukas Spyrou
That’s another point on things like that, they are lovely things to have but is there an alternative? Could you go for a run instead of using the gym. We are not saying don’t use a gym, if that is what works best for you.
Emma Knights
I am amazed, down the road from my house there is a park that has gym equipment in the park, and it’s very good.
Lukas Spyrou
That is not going to cost you a penny, is it?
Emma Knights
Exactly, you can run there, get your cardio that way, get to the park, do your weights and all sorts of different things and a nice little run home.
Lukas Spyrou
Right, so we started off, we have got our income, we know what is coming in, we have got our list of expenditure, the essential and the non-essential, or the luxury items. The next thing really on the plan is to designate where that money is going.
Most of us get our income on a regular basis, whether that is weekly, monthly or even quarterly. To really ensure that your essential outgoings are being met in each period, it’s a good idea to designate a bank account where all of your outgoings are to be paid from. Then each time you are receiving your income, you can move the relevant amount into your designated account that you have got set up to those outgoings and that can cover your essentials.
You could even have a separate account for your lifestyle spending and another for your day-to-day spending, that then reduces any risk of accidentally overspending.
Emma Knights
It is almost like segregating each part.
Lukas Spyrou
Yeah, it is separating it out.
Emma Knights
Yes, segregating it out so that this money is going to cover these things, that must be paid on these dates, I would like to do those things, so I have got to make sure I have enough so I’ll put it into there. Then whatever is left over is what you have got left to spend on going out for a coffee or going out for lunch or any other the nice extras.
Lukas Spyrou
Yeah, it is very easy if you have got it all in one pot, to see the money there and then forget potentially there is more important things later in the month and spend that money and then it’s gone. So, designating it into separate accounts is a good little tip.
Emma Knights
Most definitely. Another thing to do is look at the timing of when payments come out of your account. I always remember when I used to work in a building society this always used to drive me mad, people would have money going out of their account a couple of days before they received their income. It is so easy to spend everything and then not have enough left at the end of the month.
It is a really good idea to move all of your standing orders, direct debits and your bank accounts, so they come out within a few days of each other, and to have those direct debits come out a couple of days after your income comes in. That way you know you’ve been paid, you’ve got the money, then all of those essential things are going out of you account. Therefore, you know what there is left. There is never any risk of spending more than you expected.
Like I say, in my opinion don’t ever put them so that your income comes in on the same day as your outgoings go out. If a bank holiday happens or anything like that, where you don’t get paid when you are expecting to, that could then lead to all sorts of costs and charges on your bank account for having missed all these different payments.
Lukas Spyrou
Yes, I would certainly go along with that Emma. I think the last thing to consider when putting together any budgeting plan, once you have got your income and you have got your expenditure, if you then try and plan in any savings, or think about any savings that you might like to put away.
We see very often when people say, I’ll save at the end of the month whatever is left, I know what’s going out, I know what’s coming in, if there is anything left, then I’ll save it. If you have ever actually tried it this way, you will find that there is very little if anything left at the end of the month, because as I’ve mentioned before if you see it, particularly in a certain account and it is available there to spend, you will spend it.
Emma Knights
We have a lot less willpower than we realise.
Lukas Spyrou
Yes, it is very easily done. As you were saying, if you have got regular payments going out whenever you decide to set them up, it might be a good idea to have any savings or set amounts you can afford to be taken from the account at the same time as those regular direct debits regular bills to go into a savings account. If you take it out at the start of your pay period, it is less likely that you then are actually going to miss it, you will get used to it and it won’t be there to necessarily spend or waste away.
Emma Knights
If you do need it back, it is not put away so that you can’t get to it again, if you have put it into a deposit or a savings account, you can still get it back. At least if it is almost out of sight out of mind, it is likely to be left there to continue to grow.
Lukas Spyrou
It is just building good habits and discipline around money getting used to when the regular payments are, so it is not so sporadic, and you have really got a plan in place.
Emma Knights
Once you have got all of those things in place, I think the most important thing to do with your budget is to review it. It is all very well saying, new you, new start, new year, and you start off on this really good journey of having all these bright ideas and all these things you are going to do but actually, if you don’t keep yourself in check, it is very easy to fall into old habits and not continue them.
Just make sure you keep on top of your budget and ensure that you have got the right amount of money in the right place, and you don’t think, I’ll just take a little from there, then leave yourself short.
Lukas Spyrou
It helps you spot trends, in the way that you do things. It is easy to get into habits of simple things such as buying a coffee every morning, it all adds up. Obviously, there is no harm in buying a coffee, but these types of things which you are doing every day, day in day out, actually they do build up and could you be doing something better with that money, maybe increasing the savings.
Emma Knights
It might be the case, when we said before that if you say, I’ll leave it to the end of the month, and I’ll save what is left, people don’t tend to do it. But it might actually be that you do have some money left over at the end of the month and actually, it would be a good idea to increase your savings earlier in the month, because you never know you then might end up not spending as much through the month.
Again, if you have more money left over at the end of the month, you might reduce your spending because you are then saving more as such. It is really good to keep reviewing it on a regular basis, review your income and review the outgoings. I have done it before where you sign up to an app and you start it and then it keeps coming out of your account on a monthly basis and then actually looked back and realized I don’t even use that anymore.
Lukas Spyrou
I think just by repeating the steps that we have discussed on a regular basis, budgeting would become second nature and you would end up actually doing it without even realising.
Emma Knights
Yes, it is just creating a habit really, isn’t it?
Lukas Spyrou
That is it, yes. I think what we should probably have a look at next, Emma, is what else can we do to be organised for the year? If we had a list check, what would be your suggestion?
Emma Knights
One thing to do if you haven’t already done it, is your self-assessment for the previous year. Not everybody will need to be doing one, but some people will need to. I know there are a lot of people that leave it to the very last minute, and I know several accountants that get very stressed out with how much work they end up with last minute, don’t be one of those people.
Lukas Spyrou
Who takes a shoebox of receipts and chucks it on their desk a day before it’s due?
Emma Knights
I have heard worse, people that leave them in the sun. Then all their receipts fade because the heat changes them. A shoebox, in a dark place, could be a good place to keep them.
Lukas Spyrou
Another one to look at this year, if you haven’t already got them in place, we will cover this in more detail in a future podcast, is getting your Wills and Lasting Powers of Attorney in place, or at least up to date.
If the last couple of years have shown us anything it is that things do happen. I know they are not nice things to think about, no one wants to think about what is going to happen to them when they pass away or if they lose capacity. But as I have said, what has gone on in the last couple of years, has just highlighted how important it is to have those things in place and not only for your own peace of mind, but for your loved ones as well.
Emma Knights
Yes, definitely. I always remember my nan used to say, talking about dying doesn’t make it happen any sooner. Why not put it in place because at least then you know all your wishes are going to be carried out the way you want them to. That is definitely a very good motto that I used to take from my Nan.
Some other things to have a think about, do you need to use the rest of your ISA allowance or pension allowance before the end of the tax year. If you have got the money available, they are really good tax efficient investment vehicles to be using, it may just be a case that you need to have a look and see what allowance you have got left and how much money you have got available to add into it and just taking full advantage of that.
Lukas Spyrou
Following on from the budgeting plan set up, providing you can still afford it once you have done your breakdown of your income, in the future you will thank yourself for it. I think we talked about volatility on a previous podcast, but that is the best time to invest while markets are down does seem all doom and gloom, but actually at that point, if you have got the spare money to do it, that is the best time while everything is undervalued. You will thank yourself later, because that is the money that will probably grow the quickest and the most going forward.
Emma Knights
Yes, we have also talked about, our new year new start, a lot of people come to the new year and look for a new job too. It’s not just thinking about your new position, make sure that you get enrolled into any auto enrolment scheme that they have. Remember that they don’t have to do it from your first day, three months after you start employment is when they should be enrolling you into that pension scheme. Make sure that you are getting put into it. Also make sure that you keep track of any old pensions from any previous jobs where you’ve moved on from, you don’t want to be losing track of it. That is a huge amount of money.
Lukas Spyrou
How much is that? How much do you think is lost in unclaimed pensions?
Emma Knights
The number on it at the moment is 37 billion.
Lukas Spyrou
Wow, that is a lot of money.
Emma Knights
Yes, it is a huge amount of money and the number of people that they belong to is a ridiculous amount of people as well.
Lukas Spyrou
I know a lot of the providers have been actively tasked with trying to find a home for that money and find the people who that actually belongs to. Why sit around and wait, because if you have got money sitting there that is rightfully yours, then go and find it claim it.
There is lots of help out there and websites that you can get assistance in doing that. Another important thing I think, particularly with what is going on at the moment, get energy efficient for this year. Is there things that you can do to save on the heating, and save on your bills. There is lots of websites and forums and videos on YouTube on cost saving.
Emma Knight
Simple things like, not leaving the TV on standby and turning it off at the wall, all sorts of things like this could help.
Lukas Spyrou
I think we are going to look at getting an air fryer. I have heard that reduces your bills massively.
Emma Knights
I will warn you one thing on that though, I have seen lots of house fires from air fryers that have been left plugged into walls, you need to take the plug out of the wall as well. But yes, 100% energy efficient.
Lukas Spyrou
I will take that on board.
Emma Knights
Another thing, not only making your home energy efficient, just making sure all of your bills are efficient. In particular, if you have got a mortgage deal coming up from the end of a fixed rate fixed term soon, rates will have gone up probably quite significantly since the last time you fixed it, so shop around.
Lukas Spyrou
Mentioning rates there as well Emma, so with your mortgage as the interest rate increases, it is a good idea to shop around for the best rates on your savings accounts. Now we all know the banks obviously don’t pass the rate increases on as quickly to savers as they do to borrowers, however we have started to see them going up. Particularly for your emergency funds and your cash reserves, are they in the best place and the best rates at the time? So again, that is another one to keep your eye on and just and have shop around for that.
Emma Knights
Yes, definitely look on independent comparison sites and all those types of things, so you are not going directly because it is better to get a broad range of information to compare everything.
There are several different bits and pieces to be looking at, things that are changing from this year that you just need to be mindful of. I know we have talked about these in the previous episode when we spoke about the Autumn Budget, remember from April 2023 there will be the changes to the 45% income tax bracket. That is reducing from the £150,000 down to £125,140. Dividend allowances are also falling this year, it’s reducing down to £1000 allowance from £2000.
Lukas Spyrou
As is the CGT allowance. I think if you are looking to sell something this year, which you might have a capital gain on, you might want to think about moving quite swiftly and getting it done for the new tax year before that decrease in the capital gains tax allowance. I have mentioned before, we will probably be doing a lot of planning for clients around that time of year who are looking for capital gains.
Emma Knights
Corporation tax is also going up from April for limited companies, again anything business profits under £250,000, there’s a taper relief. It might not all go up to the new 25% corporation tax that you will be paying, and businesses with profit under £50,000 will still remain at 19%. It is just something to be mindful of, if you are a growing business, if you start falling into new profitability brackets, it could impact you. Which is obviously going to make changes to all sorts of things, you need to bear that in mind.
Lukas Spyrou
A couple of other rises to look out for, largely linked to inflation, we are going to see a rise in a pension triple lock. There is also going to be a minimum wage increase from the 1st of April 2023 by 9.7%.
Emma Knights
That is quite a big jump.
Lukas Spyrou
It is – it’s taking it from £9.50 to £10.42. Just ensure your employers, are actually increasing your pay, if that is something that is relevant for you just all these little things to be aware of, and make sure you are on top of those.
Emma Knights
Definitely, with all these changes coming in, it is always worth being savvy and making sure you are using all the allowances that are available to you. If you don’t do your return yourself, make sure your accountant is doing these things for you. Things like marriage allowances, you can use part of your spouse’s income tax allowances, spousal exemption so that you can sign things over to your spouse. You can use both of your capital gains allowances or dividend tax allowances. It is just being really savvy about it.
Lukas Spyrou
Using everything that is available to you because it is there to be used. They are not secrets or to be hidden. That’s what they are there for, just make sure you are using all of those allowances and getting the best out of them.
Emma Knights
Certainly. There are lots of things to prepare yourself for the year ahead. We will wait to see what happens.
By the end of this year, we will be able to do another review looking back at 2023 to see how things have panned out and how it compares to 2022 and we will see what exciting things have happened. One thing we have to look forward to is King Charles’ Coronation which is on the 6th of May. This won’t be just for the UK, it is something that the entire world and Commonwealth will look over.
Lukas Spyrou
Looking forward to that, there may be more street parties again.
Emma Knights
We await to see what 2023 has to hold for us.