For Australians, one of the newish digital banks is Up. There are a lot of cool features they offer but this post will focus on using Up to build a budget within the banking app itself. It's pretty straight-forward and doesn't require you using any third-party applications digging their claws into your personal financial data.
The type of budget we will focus on is a basic category-based budget. It isn't super strict but it allows you to make sure you are honest with yourself about what you are spending. So if you say you're going to spend $50 eating out this week, that's all you'll do. The bonus is, if you eat out less this week, you'll have more for next week.
The Basics of a Budget
Firstly for your budget, you need to think about what categories you would like to set limits for on your spending for each week. Here are some rough categories I follow:
- Eating out - Treating yourself to getting takeaway or dining out at a restaurant
- Groceries + Essentials - Everything from the weekly grocery shop to haircuts. Stuff that isn't really treating yourself, but is just everyday expenses.
- Sanity/Spluge - Treating yourself. This is where discretionary purchases go. Everything from that newest electronic gadget, going out to the movies or getting your nails done.
- Loving/Generosity - Buying dinner or drinks for someone else, buying someone a gift, or making a charitable donation.
- Rent + Utilities - This may not need to be a separate category as it is likely a regular payment and can just come out of your core savings/spending account.
- Tithing - For my Christian readers, this is self-explanatory. You can either set this up as a dedicated category and "pay it out" from here manually. Or you can setup regular payments directly from your spending account.
For each of these you want to set a target amount each week, for things like sanity or eating out, this is your limit. The purpose of the loving category, is to be intentional about how generous you want to be with your money. You can adjust these categories week to week as you see fit. A budget is meant to help you be intentional with your money, not about you restricting you to a level you aren't happy with.
What You Get with Up
Up is a digital-only bank, there are no physical branches. It feels more like a software company than a banking company with how they built their app. The money stored with them is still actually stored in accounts with the parent company, Bendigo and Adelaide bank, so you're money has the security of a trusted bank.
When signing up with Up, you'll get a spending account, titled the "Activity" section. You can also can create 1 or more savings accounts. There a couple of limitations with the savings accounts. Since they aren't bank accounts with their own BSB and account number, you can only make outgoing transfers to other banks from your spending account. To make payments from your savings account, you have to first transfer to your spending account and then make the payments from there. One other limitation as of today is that you can only have 1 automatic transaction setup per week per spending account. This means for our weekly budget here need to lump some automatic transfers together.
As for competitiveness, the Up savings accounts offer a 0.7% interest rate on all savings accounts, and since this budget stores almost all your money in savings accounts you get to maximise on this. The only qualification creteria at the time of writing is to make 5 purchases per month, that's it (which is pretty good given some other banks are getting stingy with this, looking at you ING). There are also pretty much no fees, see pricing details here.
One of my favorite things about Up, is that when you have a problem you can contact them in the app. It's as easy as you would create a chat conversation in Facebook messenger. I've had several "conversations" with them and their response time could be measured in minutes, not hours, it's awesome.
If you haven't created an up account, go and do that first. It only takes a couple of minutes. Here is my referral code you can sign up with for a free fiver.
Setting Up Our Budget with Up
Let's make our Up account reflect our budget!
The first thing to do once you have an Up account is to open a bunch of separate savings accounts. One for each of your budget categories. You'll also want to create a core savings account, this is the de facto place for your money to be stored. This can also be targeted for whatever savings goals you might have (saving up money for an investment, saving up for a house deposit, etc). When your income comes into your spending account, you'll want to "forward" it on to your core savings account. This is as simple as clicking on the transaction and selecting "forward" and then selecting your core savings account.
From here, you'll need to set up a bunch of automatic transfers. Because of the limitation we highlighted earlier about one automatic transaction per week, our first automatic transaction will be from our savings account into our spending account. The value of this needs to be the total of all your category allocations from above, plus any regular weekly payments (i.e. rent) that need to be sent to external banks each week. Once you have this value, set it as a recurring transaction at the start of your week (e.g. Monday 1:00am) from your core savings into your spending account.
Once we have the lump sum all in the spending account, we will set up automatic transfers for the amounts for each categirt of the budget into their respective savings accounts shortly after (e.g. Monday 1:05am). Set up your regular BSB transfers (e.g. Rent) to come directly out of your spending account. It would be preferable to have those come directly out of the core savings account, but this is not currently supported (as of writing).
That's how the money gets distributed between these accounts, let's next look at how it comes out. Whenever you make a transaction using your Up card, you'll want to "cover" the transaction by assigning it to the appropriate category. This is as simple as two button clicks in the Up app, but can be a rather cumbersome process with other banks. When you make a payment, Up sends you a notification, you can click the "cover", at which point the app will open and show your savings accounts. Click the appropriate account to "cover" the transaction with that account. That way it acts like the transaction came out of that budget category.
Once it's all in order, this is roughly how money flows through the accounts.
Tips for Perfecting this Approach
- Keep a constant round number (like $100 or $1000) in your spending account, so you can tell when there is a transaction left uncovered.
- If you have a partner, you can opt-in to 2up, to share your spending and savings accounts. The one limiting factor with this approach today is the lack of a physical 2up spending card, so you must use the digital cards (i.e. google/apple pay). You really want the transaction to hit the 2up spending account rather than the individual spending account because you can't cover individual transactions with 2up savings accounts.
Shortfalls in this Budgeting Approach
This budget plans poorly for irregular large unexpected expenses. If you have to get your car serviced and it costs $2k, then that is just going to be a big hit to the core savings account. You may be able to handle some of these things by assigning small parts of them into budget categories / their own savings categories. This may work with reasonably predictable expenses (e.g. car insurance or rego), but not so great for things like car maintainance of unforseen medical expenses.
This budget really focuses on taking control over your day-to-day expenses each week. By being concious in limiting your day to day expenses to well below your means, you should be able to build up a buffer in core savings to handle these unforseen expenses (this is sometimes called an "emergency fund" in other budgeting techniques).
Prior to using Up for my budget, I was manually going through this process using Google sheets. By using Up, I'm able to keep it all within the banking app. This makes it super easy to see at a glance how each of the budget categories is tracking. Asking a question like "do I have enough left in my budget to eat out tonight?" becomes really easy to answer.
If you aren't currently an Up banking customer, feel free to sign up with my referral code for a free $5.