When it all started
It was summer 2019, to be exact the last two weeks of August when I finally got back to the overall fitness level after our son was born in late 2016.
I remember it like yesterday when, still pregnant, I read somewhere that it takes 3 years to get your life back on track and I could not agree more. Besides welcoming a newborn into the world, there was a home change (we moved from a flat to a house), a job change and a nursery adaptation which took months rather than days. Life kept us busy but equally, we have been blessed with relatively good health. Slowly, we were also able to enjoy a good night of sleep, after what felt like endless wake ups to comfort the little one. We slowly started to focus on improving our energy levels by exercising daily. I started to wake up 30 min earlier to fit in a quick training session, Mr. L chose the gym straight after work. A few months in, we both lost around 15 kg between each other. I am amazed that the
older wiser I get the more I value the increased energy level and mental well-being as a by-product of physical training than the appearance itself. That said, who would not be happy to fit in the old pair of jeans 😉
With more energy came more brainpower to dive in into our financial well-being. Having a baby washes savings very quickly so it was time to press the reset button and start building up financial reserves and make a plan towards buying the dream house.
From a little bit of online research into personal finance, I came across Dave Ramsey – one of America’s financial gurus. His plan to build wealth is very easy to understand. In my opinion, the first few steps or baby steps as Ramsey calls them, could apply to any household in the world. I do not have an opinion about the later ones which also involve pension but I sure will explore it.
Save 1k Emergency Fund
Dave Ramsey recommends that you save 1k as soon as possible. The amount is quite small so it should be fairly easy to start. Besides that the Emergency Fund will:
# Protect your family from getting into (more) debt to cover emergencies.
# Give you a relative peace of mind in case small life emergencies happen, such as losing your car keys, booking a last-minute flight to attend to family or not receiving a full pay because you spent 4 days in bed fighting the flu.
# Push you to speed through paying off your debt (except your home). Such a small amount should give some comfort but not too much so that you come lazy with getting rid of your debt.
I agree with all the principles but one: that it should be 1k. Personal finance is exactly that: personal so it should serve your situation and it is down to you to decide how big your Emergency Fund should be. That said, do not make it too big because it may slow down paying off your debt.
When I looked at our situation, I asked myself what are the risks besides silly emergencies like losing car keys. One that came straight to my mind was a place to live. We are currently renting a house but the landlord could ask us to leave giving us only 2 months notice to vacate the property. Even the fixed term tenancy agreement will, at some point, come to an end. Yes we could renew it but equally, our landlord’s situation could change and he may want to sell the property to a first-time buyer. The sale completion would then require vacant possession. Moving out would mean extra cost for us. Let’s see how much:
- First month’s rent for the new place, let’s say £1,600 per calendar month.
- Deposit – usually the equivalent of 5 weeks rent (if the yearly rent for the property is less than £50,000): £1,843.15 (£1,600*12months/52 weeks)*5.
- Moving cost, such as van hire etc, around £150.00 – mind you this is already optimistic if we consider London prices.
- Double rent – it is very rare if not impossible to move all your belongings from the current place, have the property cleaned and allow time for a check out to give keys back if you have not picked up keys for the new place. This means that there would usually be 2-3 days with double rent to have access to two properties at the same time. If the rent for the new place is £1,600 and our current rent is £1,550.00¹ and we have 3 days with double rent, the additional cost would be: £157.81
The estimated upfront cost of renting a property in London*
*2 bedroom property in Zone 3
Ok, but what about the deposit we paid when we move into our current place? Surely we could count on that money? Well, I would not be so sure. First of all, it sits in someone else’s bank account. Secondly, the reality is that it takes time to agree on any deposit deductions so there is no way we could count on using it for the deposit for the new house. Welcome to the world of renters – frozen money in your landlord’s bank account. I will not cry over it but adjust our finances accordingly.
So if we had to move it would cost us approximately £3,750. You may argue that our 3k will not cover it. Yes, I agree but we would be able to cover any shortfall by our current funds and at the same time, we wanted to get cracking with Step 2: paying off debt as soon as possible.
Another way to look at it is to multiply 1k by the number of people in our households.
How To Start Saving
I would like to think that we make our financial decisions independently lead by common sense and sense of responsibility. Do not get me wrong, there is a long way ahead of us but the First Step is done and we will now focus on keeping the momentum going working on our projects along the way. If we consider some statistics we are now in 2/3 of Brits whose savings are higher than £1,500 and outside the 15% who have no savings at all². I know that saving money for a rainy day does not seem like fun at all but if you would like to take control of the financial piece of wellbeing then the Emergency Fund is your first step. And no, it is not ok to defer savings until you get your pay raise. Let’s have a look at some of the ideas to help start saving.
Save Before You Spend
In other words, pay yourself before you
‘eat your own money’ spent on consumption. Once you get paid and pay your bills you immediately put a certain amount aside as savings and spend only what you have left.
Salary – bills – savings = left available to spend
In theory, this looks great and makes sense. However, when I tested it just did not work for me. I ended up digging my savings pot to cover expenses. As a result, I never met my savings goals for the month and felt super demotivated with all this ‘money’ stuff. Remember again, personal finance is just that: personal so you have to test-drive a few available solutions and stick to these which work for you.
If you like this approach I recommend you set up a Standing Order (STO) which will then automatically transfer a certain amount of savings on your payday and shift it over to your savings account. This is crucial because life happens when you least expect it and the last thing you want to say towards the end of the month is: I was too busy with life to get to it.
Race With Yourself
This is the opposite of Save Before You Spend. Check your balance at the end of your payment period – whether you are being paid weekly or monthly and any money left should then go towards your savings. There are certain and significant disadvantages of such an approach. If you are a Spender and you enjoy few drinks there, new shoes here and a nice piece of jewellery because it was on sale the danger is that you will not have any spare money at the end of the month. However, if you are someone who budgets and checks the bank account balance regularly this may not be such a bad idea.
This approach works for me but I do a budget before the start of the months and I also have an idea how much I would like to save this month to hit my yearly savings target. So after spending money to cover my needs, every time I want something I then check how will it impact my savings at the end of the month. So I race with myself. Then the day before the next payday whatever is left I transfer to the savings account.
Find Your Carrot (Or A Stick)
If you are not familiar with a carrot and stick theory here’s a quick summary. It is the old story of a donkey and the best way to move him is to put a carrot in front of him and jab him with a stick from behind. The carrot = reward, the stick = punishment. By all means, this theory is far from perfect as human behaviour is more complex than two-factor motivation but finding your carrot or a stick can facilitate your way towards financial stability by helping you save money. Right now for me, my carrot is my own future house. It keeps me motivated to do the budget, check the bank account balances, give up immediate satisfaction and shut down silly cravings (which cost money) with a view that one day my dream kitchen will come true. By the way, it is not me who cooks at home but when I was young, the kitchen was the heart of the house.
Use Savings Apps
If you do not like the concept of Savings or the pain of doing so as a result of delays gratification you can use some of the tech available out there:
- Squirrel – The app divides your money into three categories: bill money, spending money and goals money. For example: “Your goals money gets kept safe inside your goals, where you see them grow towards completion. Your bill money is kept safe, then paid out to your current account the day before your bills are due – so there’s no need to ever have to worry about accidentally spending bill money. Your spending money goes into your current account as normal – for fun and spending (you can even request to break this down into weekly amounts if you find it easier to budget for a week!)”⁵ Although I see this more like a budgeting app than just savings app it may be a great option for someone who tends to splash majority of their pay check in 24 hours.
You’re Most Likely To Start Savings When You Need To
Ohh boy! Did I realise it earlier my savings pot would be
slightly significantly bigger. Some people are good with deadlines, others are motivated by nice holidays for which they easily put money aside. A slight sense of urgency may not be such a bad idea. Just be mindful of too much pressure on your shoulders whether it is to save money or losing weight – it is just not sustainable in the long term and may lead to more anxiety than it is worth.
Stick It On Top of The Fridge
Do you remember this famous fitness advise? Stick a sexy and a fit woman on top of the fridge door so that every time you crave another ice cream she will stop you from doing so? Not sure about you but this did not work for me. Seeing the woman whenever I entered the kitchen made me somehow immune to her.
However, if you are a visual person and by this I mean you process information that you can see better than information that you hear it could be worth making a graph of your savings, putting it on your wall and draw on it every time you add more money to your savings pot.
Split Your Remuneration
You could ask your employer to split your salary into two payments made to two separate bank accounts. You may agree on a nominal amount – an exact amount of money – out of your paycheck to be paid straight into your savings account and the rest to your current account. Or you could agree that the amount to be paid to your savings account will be based on a percentage of your salary. This way you will not even see this money so it will be easier to come to terms that the amount paid into your current bank account is the money you have left available to spend.
This also serves another purpose. For those who somehow perceive saving money as painful – it takes that particular action of transferring money thus ‘taking it away from yourself’ away from you.
Also, if you are working for a big organisation it may be worth asking them if they offer some kind of a saving scheme – just remember to read the terms and condition and make sure there is an option to withdraw the money at any point.
One of such examples was a saving plan for employees called “Save More Tomorrow (SMarT) created by economists Richard Thaler and Shlomo Benartzi. After running a trial at a manufacturing plant, employees who participated saw the savings increased from 3.5 % of their income to 13.6 %”⁶. For someone earning 2k take-home salary per month, this would mean an increase in savings of £202 per month. Yearly the difference would be £2,424 and over 5 year period participants in SMarT programme would save £12,120 more than those who did not opt-in.
Save % of Your Pay Rise
The more you earn the more you spend. It is called inflation of life and to avoid this comment trap it would be ideal to put aside a percentage of your pay rise towards savings. By doing so, you will increase your overall savings bit you will also keep spending less than you earn which is the simplest and the best personal finance advice.
Let’s say, your recent pay rise gives you £120.00 more of a take-home pay per month. Then decide how much of this £120.00 will you save and how much will you spend on your lifestyle. For example, you may want to apply 80/20 rule with 80% going towards savings and 20% spendings. Or the other way round. How much will depend on your circumstance and your attitude towards risk (having zero savings is a risk) but by not spending it all in the first place will be nevertheless less a good start.
I know that sometimes one year can feel like ages especially when saving money so to help us see the results I have created a little timeline to remember the progress we have already made and to give us some comfort, cuddle and a big smile at the end of day.
At the end I wanted to add that I use £ (sterling pounds) as a primary currency as this is the currency we earn our money in. I do hope that you can somehow find value in my posts but I urge you not compare your situation to ours. Through documenting our journey my mission is to start money talk without any shame, guilt or anger and to create a safe place where anyone can get ideas from, contribute their point of view or simply share their challenges (via comments).
Until next time,
1. £1,550 is not our current rent but close to it
2. According to Legal&Genereal [24 September 2018]
6. Gratton, L. and Scott, A.,'The 100-Year Life.
Living and working in an Age of Longevity'