It all happened at once: a new job, needing to pay rent, needing to pay my own taxes, insurance, …

I don’t remember all the steps, but I do remember parts of it.

Version 1 - just keep a healthy buffer The idea here is that you don’t really know what the unexpected costs will be. But you keep enough of a buffer, so if any come up, you can pay them without any debt.

There are a couple assumptions that may bite:

  • unexpected costs will never be bigger than this buffer
  • unexpected costs will be spread out far enough that I can catch up between 2

But general it was unpleasant to see the big differences in money each month. The beginning of each month and the end of each month felt very different, financially.

Version 2 - hide the savings you don’t want to spend I save 10% of my income, based on a book a read.

1 in 10 is yours to keep
-- Richest man of Babylon

So I created a savings account. Every time I got an income on my account, the first thing I do is transfer 10% to that savings account. I called it “Babylon” in the overview, and hid it away.

In my bank’s app, I can hide an account from the default view. It’s easy enough to expand the list, so I see all of my accounts. But simply hiding it to the overflow was enough to not see it.

This is important, because every time I see saved up money, I start dreaming of the possibilities. No! Not with these savings, these mine to keep not mine to spend!

Version 3 - saving accounts are free I realised that savings accounts are free… So I created a whole bunch of them. One for each saving goal I had. Examples of saving goals

  • an expensive book
  • driver’s licence
  • …

These accounts I delete after I met the goal, and spent the money.

Suddenly, I finished my education, found a job, and needed to search for a place nearby to live. And suddenly my expenses would be coming from my own budget instead of my parents. Even if I know how much I’ll earn, how much can I spend on rent so I still have enough for food and clothes?

With some help from my brother, I was able to create a spreadsheet called ’life expenses’. I added things like taxes, food&groceries, clothes, insurance, … Where I didn’t know how much something would cost yearly/monthly, I asked family and put in my best guess.

Examples of expected expenses

  • rent
  • taxes
  • clothes
  • food
  • transportation
  • software licences
  • …

I also added more saving goals type of expenses:

  • vacation trip
  • learning (books/conferences/…)
  • general savings
  • Babylon

And so I was able to figure out the range I would be able to use for rent.

Version 4 - allocate, automate, hide That spreadsheet is of course a fantastic base to create an automated finance setup!

I know which day of the month my money will come in. So I can setup automated payment from that account, to my savings accounts! The first transaction is still the Babylon one. Then, I make sure to do the most urgent payments (rent). The next day I set up to divide money to the other savings accounts (clothes, food, …)

The rent account, is an interesting one, because it’s a recurring payment I automated on a specific day of the month. I want to get it out of my income account asap, first thing after my wage has arrived. But the day of way is not the same as the day when rent is due. So I created a new account for that one! It can’t be a savings account, because I can only send money from my savings account to my own accounts (by law), not to the landlord.

Because I wanted to make sure I was never late on rent, I added a buffer of a month’s extra. So even if my wage is late, I would be able to pay the rent. This amount `round_up(1 x month’s rent)`, I treat as `0` on that account. So if it would ever go below that, I would treat it as ‘in the red’ or ‘in debt’. Again, I don’t want any real debt!

For the saving goal type things, I can automate some if I like, or I can decide every month where I would like to put my ’leftover’ money.

Version 5 - separate income and expenses (kinda like CQRS?) After a while, I created a new account for expenses. Mainly containing the combination of

  • groceries
  • transportation
  • general expenses

I automated a transaction to this account from my income account. I also have a new `0`-buffer of about 1 month’s expenses, same as with the rent. But here it’s even more useful, because these expenses fluctuate much more! I don’t want to be in the checkout at a grocery store and notice I can’t pay! (I’d feel so embarrassed) But some months, I pay more than others, and I never liked the “it’s the end of the month” feeling. And I don’t want to enable the ‘go below 0 / overdraw’ thing from the bank, that’s debt!

Another benefit of this is that I can calmly learn to adapt my budget. If I see, after a month or two, that I’m $200 below my buffer, I know that I should increase my monthly allocation to this account.

So I’m able to

  • avoid embarrassment
  • catch short term fluctuations
  • get medium-term/long-term feedback
  • avoid debt

With all that set up I could hide the income account, so I don’t see all the constant fluctuations happening there. Ah… peace…

Version 6 - separate out credit card account I kinda dislike credit cards… They are like sneaky debt honey traps. They make me overspend, because the money I see is not the money I own.

So I figured out a way to make them work for me, with a bit of a workaround… I created a new account, linked the visa to that one. The same buffer-new-`0` thing I applied here also.

Every time I buy something with my credit card, I immediately transfer money from my expenses account to my credit-card-account. That way the money is immediately ‘spent’ from my expenses account, and I know exactly how much money I have. So no overspending!

On a related note, for PayPal I added my general-expenses-account directly, next to my credit card. That way I can do more general expenses straight from my general-expenses! Much simpler that way!

In the end, what does this give me?

  • The end of the month feels mostly the same as the beginning of the month
  • I am more aware of my spending behaviour
  • I can see how much I can spend on random, fun stuff
  • I don’t spend money I don’t want to spend
  • I save long term

Why did I suddenly decide to write this blogpost? I came across Alan Lin’s blogpost about managing finances, while looking for a new place to work. And I had been postponing writing this post for a while already. So thanks Alan!