How can I manage my surplus to save for a deposit and rainy day?

Matt1892

Hi 

I would be grateful or any advice on the below: 
I currently have £1,450 after I have paid my direct debits. I currently have £1,500 in lifetime ISA however I have no rainy day fund and have always lived month to month. I have recently been taking £500 out my current straight away leaving me with approx. £850 take away fuel each month however always end up dipping into the £500 and by the time end of the month comes I have £0,00 in my current. 

I have recently invested in an AMEX card and debating weather to use for the monthly amount I spent which the card is capped at £1000 or do I not remove any money from my current account and try and built a buffer before I continue to add to Lifetime ISA?

Thank you

powerspowers

Hi Matt
would it help to go through your last few months bank statements and get an idea of where your money is going- split into categories food, entertainment, clothes etc. there’s tools you can use online. Then see which categories you can slim down and work out how much you can afford to save each month. When you have been paid, put your savings in a different account and do not touch it!! You need to be strict with yourself to break the habit of raiding your savings at the end of the month. Review your budget and repeat. What’s your target for an emergency fund? If you could save £500 a month you’d have £6k by the end of the year 

blue.peter

You might find a personal finance management program useful. I use (and recommend) AceMoney. (AceMoney costs £34.04 to buy, but there's a 15-day money back guarantee. This effectively allows you to try it before committing. Money Manager EX is similar, but free. Other comparable programs are also available.)

Using AceMoney, I set up regular payments for all of my DDs. Almost all other expenses go on my credit cards. My credit cards statements are produced a week or so before I get paid (at the end of the month), so that I have to settle them a couple of weeks after payday. When I get my statements, I treat the credit card debt as money due during the next month. Thus, when I get paid, I can see exactly how much money I'll have available at the end of the next month. I hold a little back for contingencies, and then anything over is swept away into savings or investments. In your situation, a single easy-access savings account would probably be all that you'll want for a buffer, though this might well change over time.

The amount that you need to hold back for contingencies will depend on your own situation, and it'll take a few months to work out what's right for you. However, you don't need to worry too much: you just need to keep an eye on your spending, and record all ad hoc cash withdrawals. If you haven't held enough back, you can transfer some back to your current account from savings. If you've held back too much, you can simply transfer a bit more to savings next month.

Do set up a DD to pay the whole of your credit card debt each month. Note that AmEx collects its DDs about ten days before the payment due date. In my case, my AmEx statement is produced on the 19th; I get paid on the 31st; the payment due date is around the 14th of the next month, but the DD collection is around the 3rd.

If your credit card statement date isn't convenient, talk to the issuer. They're usually willing to change it. I know that AmEx does this, because they did it for me.

You'll probably find one or two places that don't accept AmEx, though these are becoming rarer. If this becomes a problem, you might find it worth your while to get a Visa or MasterCard as well.

blue.peter

PS - the point I was making is that the important thing is to plan ahead. You should always look ahead at least as far as the next payday, and preferably further ahead than that. A year is good.

Each month when you get paid, you can look to the next payday and do the sweep to savings then. Here's a simple example, taking February pay and planning ahead for March. It's based on all sorts of assumptions that are probably wrong, but I hope you get the idea:

Date	Description	Money in	Money out	Balance
28/02/2022	February surplus b/f			£22.03
28/02/2022	Salary	£2,000.00		£2,022.03
01/03/2022	Mortgage/rent		£800.00	£1,222.03
01/03/2022	Council tax		£130.00	£1,092.03
01/03/2022	Gas & electricity		£150.00	£942.03
01/03/2022	Water		£60.00	£882.03
08/03/2022	Phone & Internet		£25.00	£857.03
10/03/2022	Car insurance		£50.00	£807.03
14/03/2022	Feb. credit card balance		£200.00	£607.03
20/03/2022	Home insurance		£10.00	£597.03
	Contingencies – retain in current a/c		£100.03	£497.00
01/03/2022	Surplus to savings		£497.00	£0.00

You'll see that the last item is the surplus to savings, but it's dated at the beginning of the month. If you do this sort of calculation when you get paid, you can make the sweep to savings immediately. The end balance, after allowing for contingencies and savings, should always be zero.

You can, of course, do this on paper. That's how I started, about 40 years ago. A money management program is just a tool that makes it a bit easier. If you've got a schedule set up, it'll automatically put numbers in for you ahead of time. This can include less frequent items, such as annual payments for a TV licence.

For budgeting ahead, MSE offers a spreadshet that you can download and complete. You can download it here.

If you assign categories to your spending in your money manager app, you can easily compare actual spending with budget plans.

Matt1892

Thank you 

kimwp

You really need to understand what you are spending on. I have an identical system to @blue.peter, but the key (to the credit card bill not using all your money for the next month) is understanding what you do and need to spend on and making sure that is within budget. £1450 is a lot to spend after bills and while some will be necessary spend, a lot of it will be money that you don't need to spend and will make a big difference to your future if you gain control of it.

blue.peter

kimwp said:

You really need to understand what you are spending on.

Yes, quite so. Putting all of your spending on credit cards is (or can be) helpful, but you do need to keep an eye on what that spending is and whether it's necessary. After a few months, you should have a benchmark against which you can constantly compare your credit card spending. You should then find yourself questioning what you're doing as you get close to it, especially if that happens a long time (say, two or three weeks) before your next credit card statement date.

Coffeekup

As everyone else has said you need to know where your money is going, for me I use a spread sheet and move money across into other accounts which are allocated for certain outgoings like holidays, birthdays and Christmas, household bills, breakdowns, food/going out/treats/prescriptions and lastly one for savings.

In a nutshell I get paid into my "main account" the money then gets moved into each of the above accounts, then what's left in the main account I can spend how I see fit. 
I always pay in 10% more into an account than I budget for... Example say I budget £1,800 for a holiday and spending money a year I'll pay in £165 a month.
This doesn't loose my momentum when I save then as the savings account is never/rarely touched and the other accounts always have enough money in to cover for outgoings whatever time of the year they arise. The 10% extra I pay in acts as a contingency if I've not accounted for something, then 2 years time if it's not spent it I can move it across to savings or somewhere else.

The key word is budgeting.
Boring?... yeah but we all should/need to take account for what we spend.
If you're spending £50 a week on food and you budget £40 you need to revise your spending or make cut backs elsewhere depending on how much surplus you have left. Doing the above will make it easier to say no to yourself "I can't afford it this week", or I can do that but will need to cancel something next week or month etc etc.

[Deleted User]

A monthly saver could be a good option - transfer across what you have surplus each month (leaving a small buffer).

Credit cards can be good if you're disciplined and not tempted to spend more than your debit card spend. 

blue.peter

Deleted_User said:

A monthly saver could be a good option - transfer across what you have surplus each month (leaving a small buffer).

Monthly savers can certainly be useful in the right circumstances. However, I suspect that it might be a bit premature for the OP at the moment. He/she hasn't yet worked out how much he/she will have available each month for such a scheme, and they usually either don't allow access until the end of the term or impose significant penalties for it. I'd be inclined to use only an easy access saver until things have settled into a steady and predictable pattern. In any case, the OP needs to build up a buffer in such an account first. I appreciate that you said "leaving a small buffer", but how small is sufficient? The OP appears not yet to be in a position to know.