Piggybanking is brilliant If you want to get a greater control over your finances.
Setting out a budget on paper is easy, it is a lot more difficult to stick to it. You need a lot of willpower or some nifty thrifty techniques to keep you on track. Willpower has to come from within, nobody can give it to you, however, I can help you with a technique to help you gain a tighter control of your finances.
There are two rules you need to understand before you start to budget properly and give yourself the greatest chance of success.
Never trust your bank
Your bank account is a liar plain and simple. When you check your bank account it is only a quick snapshot of the scenario that day. It doesn’t tell you what payments are due in or out, when your direct debits are due or when you are due to go for a food shop. Don’t be fooled into thinking that because your bank has money in it, your budget is balanced. If you are overdrawn it most certainly isn’t.
Swap “What’s the cheapest way?” for “What can I afford?”
If you are to budget effectively then your finances must lead your lifestyle and not the other way round. Many people look for the cheapest way to do something thinking they are saving money. Yet if you are overspending it is better to curb the spending – meaning you are spending within your means.
So let’s put that in a simpler way with an easy example. People can get themselves in trouble at Christmas by asking themselves “how do I have the family around, attend the Christmas parties, get the kids all the presents they want and the big tree all on the cheap?”
By doing this you have already prioritised your spending over what you can actually afford. The only question you should be asking is “What can I afford to spend on Christmas this year?” and then plan your Christmas around that.
What is the Piggybanking Technique?
It is a way of separating your money so you always know exactly what you have to spend.
It’s a simple and very effective method, but I am going to break it down so it is perfectly clear.
Select your main categories for spending
You are aiming to balance your books to avoid spending more than you earn. Once that is done take a look of what categories you have chosen. This could be Christmas, holidays, a season ticket for the football, birthdays or whatever you spend your money on. I would always advise you to have a tax account if you’re self-employed. Pick for 5 accounts at most.
Set up different bank accounts for different purposes
Now you have a clear idea of what you want to spend on and how much you would like to spend, the aim here is to make it as simple as possible for you to see exactly how much money you have.
To do this, set up a number of different accounts (one of them could be an ISA), each with money in it for a different purpose, so now your money is effectively in separate piggybanks. You can go for a current account or a savings account.
When I was doing this I set up a Flex Account with Nationwide and later went on to open a Flexclusive Regular Saver savings account with them too, purely because the Flex Current account has no monthly fee and no minimum monthly deposit, and the Flexclusive Regular Saver savings account has a fixed interest rate of 5% for 12 months.
You should always have a main bank account and an account for bills, then pick the biggest three or four of your main spending habits.
For example my piggybanking accounts are:
- Mortgage deposit fund
- Emergency fund
I also have a basic bank account for my spending money. Whatever is in this is my spending money for the month.
Feed the piggies by standing order
Now you need to feed the piggybanks. When feeding the bills piggybank you should always overestimate to make sure you have enough to cover the direct debits and do not become overdrawn or receive any charges for a missed payment.
I always set my direct debits for the 1st of the month as I get paid on 28th of the month. This gives enough breathing space just in case of any salary payment problems.
So now for the other accounts. As an example, if you are planning a holiday a year away and you know the cost is going to be £1000, you would need to put £83.33 into your holiday piggybank.
As I have no children Christmas is not the stress it is for other people, but let’s say you spend the family national average of £800 at Christmas, you would need to put £66.66 into your Christmas piggybank and apply the same process for your other piggybanks.
And in a nutshell, that is piggybanking!
The outcome: Your bank account is no longer lying to you
Now when you check your main account, you know that it is telling you the truth and the money you can see really is your spending money and there is no risk that you will overspend, miss or forget about payments, as all the money for bills and other key spending has been transferred out.
Plus if you see a holiday for £900 and there is only £500 in your account, you know you can’t afford it and you can alter accordingly!
Have you ever used the piggybanking method?
He is also a contributor to Clear Debt, ICOUNT Money and M1 Debt Advice blogs discussing all things personal finance.