The New Household Budgeting Technique That Has Completely Changed My Life and Made Me Feel Like I’m Not Actually ‘Paying’ for Anything, by Rachel Rickard Straus

For the past four months, all my household bills, groceries, vacations, and even meals have felt like they were free. That’s not because I won the lottery or have a new benefactor; in fact, I have had no change in my finances at all.

What’s different is that I started a new budgeting technique last September. Until then, I had handled money the same way for years. I had set up all my direct debits so that my bills would appear on payday.

At the same time, I put all the money I didn’t want to spend—and felt I should be able to live without—into a savings account, where I wouldn’t be tempted to touch it. Out of sight, out of mind.

I could spend whatever was left in my current account as I pleased. I didn’t follow it too closely because I figured as long as I saved enough and covered my bills, it wouldn’t matter.

But that all changed when I married James, a budgeter, towards the end of the summer.

My husband swears by a “potting” technique to manage his money. He decides how much he wants to put aside for different types of expenses, such as groceries, household bills and gasoline.

At the beginning of the month, he divides his paycheck accordingly into pots designated for each type. He has a bank account that allows you to automate this process so that when your paycheck hits your account, it goes into the various pots you specified.

He also has longer-term pots, like one for vacations and another to save for a new car, for when ours eventually runs out. When he then spends money throughout the month, he withdraws the money from the relevant pot.

He has been doing this successfully for years to manage a tight budget – first with pen and paper and then moving to automation as the technology emerged.

When we merged our finances after the wedding, I agreed to try his budgeting method. Now we both put money into the pots when we get paid, and we both spend money there too. We also set aside an amount every month for our own expenses.

It’s too early to tell if this technique has improved my spending habits or made it easier to save money. I certainly now have more control over where the money is going and that will make it easier to see where we can make cuts if we need to. I guess I’ll have to give it a year to see how it turns out. However, there have already been several unexpected benefits. The most surprising thing is that everything feels free – well, almost.

Of course we pay for everything together. But because we do this in advance by allocating the money on payday, by the time we actually buy something, it feels like it’s already been paid for.

For example, when we bought train tickets, neither of us saw the money disappear from our current accounts because we paid for them from the ‘holiday pot’. And it took the sting out of an unexpected £300 bill to fix our car’s clutch last month, when we could have paid for it from the ‘car maintenance’ fund.

Behavioral economists have a theory for this phenomenon: it’s known as the pain of paying.

The idea is that when we spend it causes pain, but there are ways to reduce this. One is to pay in advance to separate the pain of paying from the item you purchased. For example, if you pay for a holiday in advance, it hurts when you provide your card details and the money disappears from your account.

But by the time you go on vacation weeks or months later, that payment will be a distant memory and won’t detract from the enjoyment of the trip. Pay at the end of or after the holiday and it will bother you the whole holiday – and it will be an unpleasant last memory associated with it.

The second benefit of our budgeting strategy is that in November we went to see a brilliant ballet production of Alice In Wonderland at the Royal Opera House in London. We have one jar labeled ‘fun’, which we use for the occasional treat, like going out to eat.

When the balance of this pot starts to rise, it’s a useful reminder that we haven’t been out for a while. When that happened at the end of last year, it prompted us to book those ballet tickets.

This time of year we’re bombarded with ideas for New Year’s resolutions and strategies for getting money into shape – and more often than not they start with some kind of new, complicated budgeting technique.

Behavioral economists have identified the phenomenon of the pain of paying, but there are ways to reduce it

I often wonder: who actually does these things? We may know that a new way of budgeting can be helpful, but if you’ve been managing your money one way for a long time, it can be difficult to break the habit. We may not even realize that we have a certain style because we have been doing it for so long that we don’t even notice it.

Well, I did it last year – and so far so good. If you’re looking at your bank balance for the new year – or actively avoiding it – and considering a change in strategy, I recommend you give it a try. And leave it up for review. You can always revert or adjust it if you don’t like it.

There is a third unexpected benefit: I know whether I need to do some shopping on the way home from work. Whenever one of us spends money from our joint account, we both immediately receive a notification on our phone with the amount and from which pot it was withdrawn. I regularly see a few kilos disappear from the grocery jar and think: ‘Phew, he remembered to buy milk.’

Keep an eye on the Magnificent Seven

If there’s one thing I wouldn’t have predicted this time last year – after the US stock market posted a 24 percent gain in 2023 – it’s that they would do it all again and rise another 23 percent in 2024 .

The FTSE 100 rose a respectable 5.6 percent last year – but that seems small compared to the massive gains in the US.

Can the US do it again? You’d think a winning streak like that couldn’t continue, but you might have thought that a year ago, and it did. I usually console myself with the thought that I don’t need the answers – I tend to invest in passive funds that simply buy the market rather than outperform it. This way I don’t have to bet on the winners and losers.

This year, however, I’m starting to get a little worried. The seven largest companies listed in the US – known as the Magnificent Seven – are so large that they account for almost a fifth of the value of all large and mid-sized companies listed in developed and emerging markets around the world.

If any of them were to take a dive, it could seriously damage even a fully balanced portfolio that simply tracks the value of all global stock markets. I wonder if this is a year to make active decisions to be less dependent on these huge American corporations – or hope for another gravity-defying year.