If you find saving money tedious, painful or restrictive then the conscious spending approach is for you.You may have started a new budget to reign in your spending this year, but already you notice it’s starting to fail. Despite your best intentions your willpower is beginning to diminish and you’re leaking money.

You might be thinking you’ll try again next month when you get paid, only for this cycle to repeat. Every time you try to save money you’re left disappointed and with little to show for it. This results in you being more self-critical, which leads to anxiety and in order to make yourself feel better you resort to emotional spending. In fact, a quarter of the UK workforce worry about money, so you are not alone.

Maybe you are succeeding but you’re already on that repetitive cycle of getting frustrated and annoyed. Life just seems to become miserable when you try to save, as you cut the things out that you enjoy.These are very common experiences for people who try to save money. There are very few successful long-term savers. This is because most budgets fail and the reason most budgets fail is that they are unsustainable.The reason budgets are unsustainable is because they completely ignore the obvious fact. That we are human, with human wants and needs. However, don’t give up hope yet, you can turn things around with a conscious spending plan.

Ditch The Financial Diet, It’s A Waste Of Time

Traditional budgeting forces the individual or family to make cutbacks and usually the first thing to cut is all the fun stuff. I remember at age 7 or 8 my parents telling us we were saving up for a big trip to Florida in the US, but this meant that we wouldn’t have a holiday for a few years.The point of the micro-anecdote is how easily the concept of financial dieting is instilled in us from a young age. That in order to have one thing, you have to give something else up. Rather than money give you options, it actually takes them away.

In the modern-day, millennials are often told to give up buying coffee and avocados, takeaways, meals out. All the things that get us through the week. When this restrictive financial diet fails, people are often made to feel guilty, and add another failed attempt at budgeting to the tally. This is similar to fad diets, which cause people to yoyo in weight. Rather than a sustainable model of diet and exercise, people enter a short period of deprivation. They lose weight for a short period of time only to put it back on (and more) when the diet ends.

Time To Change Your Financial Model

In my opinion, restrictive budgets are a waste of time and they do not harness our brains natural psychology. They use it against us. Budgets make people feel bad about themselves and the evidence shows that increased self-criticism is often met with increased indulgence to try and get us feeling better. In order to avoid the negative feedback loop, we need to move towards a different model of saving.This is the model of conscious spending and it requires just 3 steps:

#1 Categorise Your Spending

The first component of a positive financial model that allows you to successfully save over the long term is to categorise your spending.

  • Fixed costs (rent and bills)
  • Important investments (Stocks And Shares ISA)
  • Savings goals (House Deposit)
  • Guilt-free spending (dining out, movies, holidays)

Fixed Costs

Add up all your bills that you pay out on a monthly basis. I’ll tell you my share of the household bills:

  • Rent: £350
  • Gas Electric: £100
  • Water: £25
  • Council Tax: £60
  • Groceries: £125

Then add 15% for the unexpected payments and volatility (£660 x 1.15 = £759). For example, the week of publishing this post my car needed a £96 repair and I went to the dentist (£50). What’s important here, is that 42% of my income is solely attributed to bills. This is important when it comes to our new model for 2 reasons.

  1. This is the 20% of things which cost you 80% of the money (see Pareto’s Principle). Can you see any obvious immediate big wins (80%) from switching energy suppliers or negotiating your rent (20%)?
  2. If not, then don’t feel guilty about the 42% of money you cannot save, it’s dead money. This reduces your savings expectations to a realistic level so you don’t get frustrated.

As a rule of thumb rent and utilities should cost between 25% and 30% of your income. If your costs are within this range you shouldn’t feel guilty for having a good standard of living.

Take my quiz to find out what budget type you should be using.

money management for concious spending

#2 Set Financial Aspirations

Rarther than focus on the negatives of cutting things out of your lifestyle, focus on the positives. It’s likely that you will have money dreams and ambitions. For example, I aimed to max out my help-to-buy-ISA to £12,000 by mid 2021 in order to take advantage of a maximum £3,000 goverment bonus when I buy a house. The account also serves as a cash buffer with a 0.75% interest rate, which is better than most current or savings accounts.

The point here is that your money is given a conscious purpose and there is an intention for saving. This makes me apply a conscious action in order to direct my money and make my spending fit around this goal (see, the paying yourself first principle).

Investing is my second financial focus with the goal of being financially independence by 2036. This means that I apsire to have enough passive income from my investments to cover my expenses.I use a financial freedom calculator to check that I am on track for this goal. However, you might instead want to target an investment rate of 10% to 20% of your income.

Focusing on a realistic contribution will help you to maintain a stable monthly payment long-term. Which is essential for positive returns and navigating through the peaks and dips of the stock market. Money that I invest is money I will absolutely not touch for any reason until I reach financial independence.

#3 Build An Automated Financial System

Now that you have an idea of where your money is going and how much you intend to save. Build the positive financial systems that will facilitate this. There is little point to setting goals if you do not have the systems in place to accomplish them. In the early days of saving money and investing, you will find that it’s more of an organic rather than a concrete structure. As such you might get the exact numbers of percentages a little wrong. Don’t be too hard on yourself and allow a margin of error.

The important component here is to split your money up by each category when your pay-check comes in. In order to do this you should set up regular transfers from your current account into the separate bills, savings and investment accounts. That way, you don’t even have to think about it. For example, my fixed bills go into my joint-account with my partner, my investments go into my Fidelity account, my savings into my help to buy and my spending money into a separate current account.

reverse budget for conscious spending

#4 Track Your Spending

Download a budgeting app such as Money Dashboard, Snoop or Cleo. This is an essential step for anyone who wants to start saving, the reason for this is two-fold:

  1. You need to build a conscious awareness of where money goes.
  2. There could be unknown pockets of potential savings you do not know about (remember the 80/20 rule here).

Rather than starting off with a vague idea about making cutbacks and saving money, tracking your spending will deliver a conscious spending plan. If you don’t like seeing where your money is going, you have the power to change it. I would look for repetitive behaviours or deeply embedded habits that don’t bring you any joy and try to replace them with something more positive and cost effective.

I would also use my net worth tracker to check that you are sticking to your goals of paying yourself first and investing into your savings accounts. You should hopefully see your net worth trending in the right direction. This is the final step in building a positive feedback loop that rewards the conscious spending approach. After taking these actions you should:

  1. Know where your money is going, resulting in less anxiety.
  2. Be achieving your savings goals.
  3. Enjoying the money you spend (guilt-free).
  4. Have more money for the things you enjoy.
analyse spending for concious spending

Remember It’s Conscious Spending Not Restrictive Saving

Whether you are spending guilt-free money or investing in your future. The flow of money is always outwards from your current account into your savings or spending accounts. Your money is consciously allocated a purpose. By the point you complete step 3, you should be consciously aware of where your money is going and why.

This will allow you to shift from the mindset of traditional budgeting and restrictive spending to a more free pursuit of the things you enjoy. You will find that money becomes more about what you love than what you cannot have. Ultimately, you want to simplify your life so that you are less anxious about money.

Whilst there is a place for frugality and sensible spending, it is not the all-consuming aspect of money. Likewise, where there is a place for spending, this doesn’t mean you will want to be reckless and spend all your money on designer clothes.

Conscious Spending Is About Looking Forward Not Back

Once your money has been given a savings purpose you are then left with money to be enjoyed. However, there is a caveat to this which is that we want to maximise the enjoyment value of the money spent. You might start with £2,000, pay yourself £800 in savings and spend £759 on bills. This leaves you with £441 in guilt-free spending. However this doesn’t necessarily mean you should spend it all on purpose without a reason. Like investing you want a good return, you want the same positive return on investment when you spend it.

You might think i’m saying you shouldn’t get an Uber instead of the bus home. By all means, convenience should be included in this pot. What i’m actually saying is you should be aware of pointless and/or repetitive behaviours.Where possible try to allocate this money ahead of time and have guilt-free pots of spending. For example, you might enjoy a wine or coffee subsription or spending a little extra on a meal or holiday.

People often feel guilty about spending for a number of reasons such as their money scripts. I was once someone who would have felt guilty for spending money on things such as the above. Approaching money with these steps is one of the best strategies for overcoming it.

To sum it all up, you always want to be forward-looking and getting excited about your potential future lifestyle. This is the opposite to the traditional restrictive budget which has you reviewing your spending and making you feel bad. Conscious spending will allow you to anticipate your needs and allocate your guilt-free spending towards things that bring you joy. Life is about balance. Hopefully this approach will help you find a middle ground between planning for the future and living for today.