Could Monzo help you to spend less?

Monzo is a new kind of bank with a strange name – they were originally called Mondo but had to change their name because of a trademark dispute and Monzo was what they came up with instead. They intend to offer a full current account later this year but meantime what they offer is a brightly-coloured and eye-catching prepayment MasterCard.

Screenshot Monzo Card

It’s not a credit card or a debit card – it’s a “prepayment” card, which is linked to a smartphone app. You can only spend what you’ve already transferred to the card – there’s no credit limit or overdraft to dip into. That’s already a “good thing” as it removes the temptation to spend more than we know we should, but the really great thing is that every time you use the card, Monzo immediately sends your smartphone a notification and updates the app to show the balance left on your card. This makes the Monzo card almost as good as cash!

Let’s hear it for cash

When it comes to money management, Cash Is King.  The CAP Money System, devised by Christians Against Poverty, recommends that families use cash instead of debit cards for all “discretionary” spending – groceries, housekeeping, and treats like take-away meals and DVDs. Draw out in cash what you have decided to spend each week, and when it’s gone – it’s gone. At any time you can see how much cash you have left to spend, and the act of spending money creates helpful “friction” – you have to part with lovely £20 notes and all you get back is a few coins – you instantly feel poorer, and it’s not nice. Debit Cards are comparatively “frictionless” – you hand over the card, make the payment, and then you get it back again. It seems like nothing has changed. Somewhere up in the “cloud” your bank account will eventually be updated, but that’s quite remote and doesn’t have the same impact. It just doesn’t feel like you have spent any money.

The next best thing

It’s not as powerful as cash, but the Monzo card is a good second-best, and motivationally is streets ahead of the standard debit card. It works really well for contactless payments. One problem with using debit cards for contactless payments is that you have to trust the technology that your account has been charged the right amount of money. Even with online banking on your smartphone it can take hours or even days before the payment shows up in your account. With Monzo the notification is instant, signalled by the sound of coins falling, which is strangely comforting. So long as your smartphone is linked to the internet, the balance shown on your Monzo app is kept updated, which really helps to keep track of your spending.

Could Monzo work for you?

The key to making day-to-day money management “easy” is to do the hard work up-front. That means deciding up-front how you’re going to use Monzo:

  1. what kind of spending you’re going to use it for,
  2. how much you will budget to spend, and
  3. how often you will top up the Monzo card.

I have found it best to set up a standing order to transfer money to the card, rather than topping up “on demand” – that way you’re less likely to create an unhelpful habit of transferring more money, and more often, that you decided when you did your “hard” thinking up-front. I have learnt this lesson the hard way.

It’s your decision

Monzo is working well for both me and my wife Sue, since we both started using them as our spending accounts a few months ago. May was a landmark month for Sue – she reached the end of the month and for the first time in recorded history she still had money left in her spending account!

But you will have to decide for yourself if a Monzo card is a good idea for you. Bear in mind that prepaid cards are not linked to a bank account so they are not covered by the official FSCS scheme that guarantees bank account balances up to £85,000. You can use them to get cash from an ATM, but you can’t use them to get cash back at the supermarket checkout. Also, they may not operate in exactly the same way when Monzo starts offering traditional bank accounts later this year. I’ve read that Monzo may start offering overdrafts which from my “Easy Money” point of view would be a bad idea and a backward step.

I’d love to hear from Monzo users out there – is it working for you? What tips would you like to pass on?

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Spending – Cash versus Card

Loss, Pain, Fear – these are our friends when it comes to controlling our spending, if we can learn how to use these emotions to our advantage. When we spend cash, researchers have found that we experience not only a sense of loss but also physical pain. But it’s not the same when we use cards, as the experience is almost “frictionless”. That’s why Cash is the undisputed King when it comes to controlling our spending. Cash is gradually losing out to Debit Cards, but it still accounts for almost half of all spending in supermarkets. If you don’t do this already, then I challenge you to try using cash for your next weekly supermarket shop. It will save you money. Switching to cash typically reduces the amount people spend by about 10%.

Cash is King
Cash is King

Make a Friend of your Fear

Are you reluctant to try? That’s probably because you’re worried that you might not have enough cash to pay the bill when you get to the checkout. And if we dig a little deeper, it’s really the fear of being embarrassed in public. This is classic Type 1 (fast) thinking – while you were reading my challenge, you probably started to imagine yourself at your local supermarket checkout with not enough money to pay and immediately decided that you didn’t want to take that risk. So now you need to slow down, engage brain, and do some Type 2 (slow) thinking – you might change your mind.

You know how much you can afford to spend at the supermarket. If you spend too much this week, then you won’t have enough left to last for the rest of the month. So when you stop to think about it, wouldn’t that be a bigger problem than the momentary embarrassment and inconvenience of having to put back a few items at the checkout?

Once you’ve made the decision to use cash, then Fear becomes your friend and works FOR you – it’ll help you ensure that you DO have enough cash at the checkout – by shopping more carefully and carrying a little extra cash, just in case. And in bigger supermarkets you can now eliminate the risk of embarrassment by doing your own checkout, so it’s easy to stop when you reach your limit. In some stores you can scan things yourself using a hand-held scanner as you put them in your trolley.

Using a Cash and Card Combo

But in a digital world we can’t use cash for everything. We’re spending more and more online, with Amazon, EBay etc., and for that we typically need to use a card. So in reality you’re almost certainly going to be using a combination of cash and Debit Card for your spending. It will make managing your spending a lot easier if you use only one Debit Card linked to your Spending Account (see previous post). And the combination of debit card and bank account should feel as much like using cash as possible:

How much have I got left?  With cash you can see what you’ve got left, every time you spend – you can even feel the thickness of your “wodge”! With a Debit Card, you’ll need to check the account balance online – so you need a good app on your phone that’s easy to use, and text alerts can be useful too.

When it’s gone, it’s gone. A bank account with no overdraft will feel more like cash, as you can only spend what you have left in the account. Overdrafts are an expensive way to borrow, so your bank may be quite happy to let you go overdrawn from time to time – or even all the time. But you might be better off in the long run with an account that simply doesn’t let this happen.

It’s worth considering a Prepaid Debit Card. These can be used just like other payment cards, but you can only spend what you’ve loaded on to the card account. They are also used as a modern way of giving pocket money to kids, and if they work for kids then they should work well for “lazy thinking” grown-ups too. I recently switched to a Prepaid Credit Card which I now use for all my non-cash spending, and in my next post I’ll tell you how that’s working out.

 

 

 

 

Setting up your Bills Account

In my last post I described how a ‘’jam jar” account used only for bills can be used to simplify the way you manage your finances. From the feedback I’ve had I know that some of you are thinking you’d like to have one of these but are wondering how to go about setting it up and getting it working. So here’s a brief and simple step-by-step guide. You may find this post, in the words of Morecambe & Wise, “a bit long … and not a laugh in it”. But if you’re not sure how to set up your Bills Account, and you’re feeling a bit daunted, then this is for you.

 

Screenshot 2 Accounts

Step 1: Two Bank Accounts

You’re going to need a minimum of two bank accounts – one for bills and one for all your other spending. Your main account will be the best one to use for your bills account as that’s probably where your income is paid into and where all your direct debits and standing orders have been set up. You could be already 90% set up – just one more push. Ask your bank to set up a second account for you, or use one you’ve already got – this will become your Spending Account.

Step 2: Add up the bills

Draw up a list of all your bills, like the simple example below. For bills that aren’t paid monthly, you’ll need to calculate the Monthly Equivalent amount. The total of the “Monthly Equivalent” column is the amount you’ll need to set aside each month in your Bills Account – let’s call this your Monthly Set Aside.

Description Amount Frequency Month Monthly Equivalent Notes
Council Tax £1,200 Annual April £100 10 payments of £120
Gas & Elec £150 Monthly £150 Budget payment
Car service £600 Annual October £50 Only an estimate
Cleaner £20 Weekly £86 Monthly = weekly x 4.3
TOTAL £386 = Monthly Set Aside

You may already have made this list, if you’ve gone through the process of setting up a budget. If not, this is a very good place to start. Use a spreadsheet if you know how. Or a free online budget planner – like the one provided by the Money Advice Service:

https://www.moneyadviceservice.org.uk/en/tools/budget-planner

You can use and store this planner online or download your own spreadsheet version.

You might find that drawing up your list is hard work, even painful. Maybe you’re not looking forward to finding out how much all your bills add up to. But you only have to create this list once. After you’ve done it, then it should be pretty easy to keep it up-to-date. And you should find that you’re happier just knowing how much you need to set aside every month to take care of all your bills. All that detail reduced to just one number – result! That’s what I mean by my blog strapline “making money management easy for lazy people”.

I have about 30 bills on my list. I include some things that aren’t fixed, but I know roughly how much they are going to cost and I’m not going to be tempted to spend more than I have to. Like my annual car service and MOT. I include them in my list of Bills so that I can be pretty sure that there’ll be enough money in my Bills Account to pay for them when the time comes.

Step 3: Organize your income

The simplest way of dealing with your income, if the amount you receive each month is fairly predictable, is to have it paid into your Bills Account. You can then set up a monthly standing order to transfer all of your monthly income, less the monthly amount you need to set aside for Bills, from your Bills Account to your Spending Account:

Monthly Income (after tax etc. has been deducted):           1,500

Less: Monthly Set Aside                                                              – 900

Monthly Transfer to Spending Account                                    600

If some of your income is paid weekly or you get benefits on a 4-weekly cycle, then calculate what the monthly equivalent is and use that in your budgeting. As a rule of thumb, multiply weekly income by 4.3, and multiply 4-weekly income by 1.08. An online budget planner will do this calculation for you. But a word of warning: if most of your income is 4-weekly benefits or state pension and most of your bills are monthly, then you’ve got a problem that I can’t really address in this blog – you may need to get advice.

If you’re self-employed, and you periodically have big tax bills to pay, then you probably already have a separate account for all of your business income and expenses. And you may already be “paying” yourself a fixed amount every month, which you transfer from your business account to your personal account. If so, then you can go ahead and set up a Bills Account just like someone who’s paid monthly.

Step 4: Build up a buffer

You’ll need to build up a “buffer” in the Bills Account to cover any big annual bills that need to be paid in the first few months before you’ve had time to save enough via the Monthly Set Aside. It’s quite a complex calculation to figure out exactly how much “buffer” you’d need when you start up, so in practice when the first few annual bills arrive you’ll need to check if there’s enough in the Bills Account to cover them, and if necessary top up the account.

However the amount of top-up you’ll need will almost certainly be smaller than the annual bill that you have to pay, as you’re already saving towards your annual bills from the very first Monthly Set Aside that went into your Bills Account. After a few months you should find that little or no further top-up is required.

Step 5: Leave it alone

Your Bills Account should need very little maintenance. You’ll have to update the Monthly Set Aside as your bills change. But try to avoid dipping into the account if you’ve run out of spending money, and there seems to be a lot of money piling up in your Bills Account. To make it a bit harder to get at, I keep my Bills Account debit card in a drawer and only get it out when I need it to pay a bill. Tell yourself that the money in the Bills Account has been set aside to pay bills, so it’s no longer yours to spend. As you get used to it and learn to think of it differently, you’ll find it easier to leave it alone.

Phew! That was all a bit dry and detailed, but I hope some of you find it useful, and that it encourages you to get your own Bills Account up and running smoothly.

Jam Jar Banking

I’m not sure any of my grandparents had a bank account – except perhaps a savings account with a local savings bank or post office. Their working class economy ran on cash. The men brought their weekly pay packets home to their wives, who then extracted all the money that they needed to run the household before returning a little “beer money” to their husbands. It made sense to divide up the money between jam jars or pots for each purpose: rent, fuel for heating, housekeeping, clothing etc. This helped to make sure that the money needed for one purpose didn’t get spent on something else.

Screenshot 2017-05-17 16.20.39

Now we think of “money” as the stuff in our bank account – virtual money that we can’t see or touch but which flows digitally in and out again via direct debits, standing orders, plastic cards and PayPal. The modern bank account is a technically impressive payment mechanism but entirely useless as a money management device. The best we can do is check the balance occasionally, which is about as useful as checking the level of the water on the harbour wall when you don’t know if it’s high or low tide.

So if you feel daunted when you look at your bank statement, the problem is not with you – it’s because of the way that the information is being presented to you. It’s almost as if someone is deliberately trying to confuse and discourage you by giving you too much information all in one go, in a long list that’s not sorted or categorised in any way. We’ve all met people who try to browbeat us like that!

But we can make our task a lot simpler and easier to cope with by sub-dividing this mass of raw data into separate piles. We can do this by setting up multiple bank accounts like the old-style jam jars, with separate “Jam Jar” accounts for different purposes. In fact the money we spend each month falls into two main categories:

  • The stuff that’s pretty much fixed and goes out automatically: mortgage payments, rent, Council Tax, electric, gas, mobile phone, Sky, Spotify etc
  • The money that we spend personally which isn’t for a fixed amount each month, which mostly goes on eating and drinking, including supermarket shopping, costa coffee, takeaways and all cash spending

We can dramatically simplify the management of our spending by using separate bank accounts, one or each type of spending:

  • a BILLS account, for all the direct debits and standing orders (and your pay goes in here too). On average, this will account for between half and two-thirds of our monthly spending, and an even higher proportion of the number of entries on our bank statements.
  • a SPENDING account, for all the rest. Once all the BILLS traffic has gone, there will be relatively few payments going out of your CASH account, so it will be much easier to see what’s going on.
  • A SAVINGS account. I’ll talk more about saving in a later post.

It’s important to make this process as easy as possible. So it’s worth putting a little hard work into setting up your BILLS account and, if you don’t do this already, switching all your regular bills over to monthly direct debits. Once all the bill payments are going out on a monthly basis, it’s a simple matter to add up all the monthly payments, subtract that total from your monthly income, and figure out how much you have left each month that you can safely transfer into your SPENDING Account (and your SAVINGS Account). Now you can pretty much leave the BILLS Account to fly itself on autopilot, and concentrate on managing the money in your SPENDING account without being confused and distracted by all those extra bill payments.

Remember, we’re not trying to save every last penny, we’re aiming to make money management easier for “lazy” people like you and me. And just one accidental overdraft caused by a badly-timed direct debit that I forgot about could easily cost me £20 or more. So I smooth out the lumps in my spending as much as I can. I’m happy to leave it to British Gas to set my monthly budget payment, and to move this up and down occasionally. And I pay my car insurance over 12 months – yes I pay a little extra, but that’s one less lump sum that I have to think about how I’m going to pay it. Every time I switch a bill over to monthly payments, that’s one more bill that I’ll never have to worry about again – result!

Some banks are now offering Jam Jar Bank Accounts, and I’ll put more information on this in a separate post. But it’s easy to create your own, by turning your existing main bank account into a dedicated BILLS Account, and using a separate bank account (or a prepaid debit card, or good old–fashioned ‘cash in a jam jar’) for your SPENDING.

You may well be operating a version of Jam Jar Banking already. You may also operate additional accounts for other purposes, such as running your car. If so I’d love to hear from you – how does it work for you? What tips would you like to pass on? Please leave a comment by clicking on the word “comment” directly underneath the title of this post.

Easy Money – the journey starts here

Money fascinates me. We all know a lot about it and deal with it every day, even though economists can’t agree on exactly what it is. As a banker I’ve dealt professionally with money and debt all my working life. And I have personally struggled with overdrafts and credit card debt for many years before gradually getting the upper hand. I’ve also tried to help other people with their money management problems. For several years I volunteered as a Debt Counsellor with Citizens Advice, and now I’m a Money Coach for Christians Against Poverty, who have developed the excellent CAP Money System as a way of managing money.

I’ve learnt that managing money well or badly has as much to do with emotion as with logic, and that psychology is just as important as arithmetic. A lot of money blogs seem to assume that we all like dealing with numbers and we just want some help in analysing the cheapest deal, or the highest rate of interest on a savings account. In this blog we’ll be starting from a different point. My assumption will be that most of us don’t like thinking about money. We only do it because we have to. We don’t feel good about money; we never seem to have enough and we often struggle to make it stretch to the next payday. We suspect that other people manage it better than we do. Perhaps thinking about money makes us feel guilty – perhaps we feel that we have failed in some way – because we’ve not earned enough, or not saved regularly, or spent too much on the wrong things.

My hope is that I can help more of us to enjoy the feeling of financial wellbeing more of the time. That means not thinking about money most of them time, and when we do occasionally have to think about it, we feel OK about it. It doesn’t mean being rich, but it does mean being able to open the morning post without a feeling of dread. This is what I mean by “easy money” – making it easier to manage money on a day-to-day basis by organising our finances so that we only have to think really hard about money (which we don’t like doing) very occasionally.

I’ll be talking about simple ‘easy money” tools and techniques that we can use to increase our financial wellbeing. Some of these you’ll already know about, others may be new to you.

Things like “Jam Jar” accounts: many of our grandmothers had a row of jam jars into which their husband’s weekly pay packet was divided – a jar for rent, groceries, milk, rainy days etc. It was a good way of making a small amount of money stretch. We can use multiple bank accounts in the same way. You can start by using one account for paying all your regular monthly bills, and a separate account for everything else. That way you don’t have to worry about having enough left in your account to pay your monthly bills, and it’s a lot easier to see how much you’ve got left to live on.

Things like using cash when shopping for groceries. We find it much harder to spend cash – we actually find it painful – so we instantly become much cannier shoppers. Research has shown that people who go shopping with cash spend significantly less than people who pay with plastic.

I’ll be talking about these ideas and others like them in my blog, and I’d be interested to hear from you about your experiences, and about tips and techniques that have worked for you. Let’s learn from each other.

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