The “Money Makeover” – Allocated Savings
OK, so we have created our budget, we are nearly ready to start really getting underway with our journey, but we have one more thing we must prepare before we set off. This is our "allocated savings".
What is "allocated savings"?
We are going to be saving money, eventually a lot of it - be it for things like loan repayments, vacations, car maintenance - anything. This money is going to need to be "tagged" for certain things to ensure we do not look at our savings and think we can finally realise our lifelong dream of swimming in a pool of chocolate peanuts.
Our "allocated savings" gives us a quick way of seeing what we have in our savings, and what it is for.
Savings need a savings account
Since we need to start saving, it means we are going to be putting our money into a savings account. If you don't have a savings account, then open up one with the bank. Most will jump at the chance and they only take £1 to open. Try to find one that is easy-access since when an emergency occurs, you don't want to mess around trying to get the cash you need.
My bank offers an "online saver" which offers slightly better than the normal savings rates, since it is all managed online. When I transfer money between my current and savings account, the transfer is instant. Great. Job done.
A savings account will enable us to get a little money back on what we put in (don't start making "cha-ching" noises just yet, even returns on high-end savings accounts sucks), which will help soften the blow of all that interest we are paying out the credit card companies and whatnot. So, I really recommend sorting one out. If you can't, then we will need to keep it in your current account, but keep trying every month as your financial situation improves. Ultimately, not having one will cost you money!
Setting up your "allocated savings"
OK, so we have somewhere where we can put our cash. Great, now we need to track what each of those £'s are destined for. If you took my advice when creating your budget and used a spreadsheet, then simply add a new sheet for called "allocated savings". If you didn't, grab a new piece of paper and write "allocated savings" at the top of it. See? Money management is EASY! :) I am going to assume that you ARE using a spreadsheet (and again, if you're not, I urge you to reconsider!).
This sheet is dead easy to set up. All we want is a table with two columns: "Saving For" and "Amount Saved". The "saving for" is just a description of what the cash is in the savings for, and the amount saved is obviously the amount that is in the savings account for it. Smarten up the formatting, setting the "amount saved" to a currency field. To complete, simply add another row at the bottom to calculate the total, using the spreadsheets "SUM" function.
Once this is done, we should have something like this:
* I have added a column for total required so I can have conditional formatting in place.
Using your "allocated savings"
Each month, we are going to be tagging some cash for something. This could be anything, but rest assured there could be money coming in and out each month. This is why I suggested keeping the sheet right next to your budget - you will use it a lot. For now, this sheet is likely empty, so just put some dummy values in like "Item 1" and "£0" and so on. Don't worry, we'll be filling these soon enough :)
So, really simple to use. Each month when you are doing your budget:
- Move money into the account (either creating a new row to tag what it is for, or adding to an existing one) AND/OR
- Move money out as appropriate (making sure you take the figure off the tag, or remove it if empty).
- If the SUM at the bottom of your allocated savings is ever different from your actual balance, then we have a problem and someone (you) has been naughty.
Tweaks and Tips
Here are a few tips for keeping your allocated savings informative and easy to use:
- When saving towards a fixed amount for something, set up "conditional formatting" on the cell to highlight it red until that figure is met - and then make it green. It can be real nice to see the little green lights popping up as time progresses.
- If you find you are having problems with your "allocated savings" coming out of sync with what your actual account balance is, try moving the sheet to a "transactional" model. Rather than just add and remove amounts from a single figure, give all additions and subtractions their own line and a description and date. You can then use things like PivotTables to summarise the data for you (giving you the total figures) but you will be able to trace account changes back to a date to see where the discrepancy arrived between the sheet and your account statement. This obviously takes a bit more time, but the additional data should really help until you get OK with just having the summary figures.
- Play with the formatting and structure! If you are not too keen on the way I do it, make your own! So long as the sheet makes it easy to track savings, it's all good!
Happy saving! :)