The Richest Man in Babylon: Back to Basics Budgeting


(Stuart) #1

(Stuart) #2

Top 5 budgeting tips from Monzo’s Head of Financial Difficulties

This is the start of a discussion about money management, which I’d like you, our community, to shape. You can read more about what we’re trying to do in this blog post, but in a nutshell, we want to build a resource that helps you manage your money better. This thread is designed to kick off the conversation, but I’d love to hear what kind of advice would be most valuable to you, and in what format.

I’m really excited about this!

Get organised - Whatever apps or tools you use (if any), the starting point for budgeting is to get organised and understand exactly what you have going out automatically each month and when. These are costs like rent, utilities, phone bills and will usually be your fixed costs. If you’re afraid of missing anything out, the Money Advice Service has a useful budget planner you can use to work out an overall budget. This is also a good time to do all those annoying things like cancelling memberships you aren’t using, switching utility suppliers and looking for ways to reduce your bills. For all things money I use Money Saving Expert (Martin Lewis is a hero of mine) and you will have a good starting point for what you should be paying for many things.

Sleep on it - Try and control your impulses. My colleague Zander wrote an excellent blog post with examples of potential design features that included adding ‘positive friction’ to help people protect themselves from ‘impulsive purchases’ they later regret. But this isn’t an available feature (yet) and some purchases simply cannot be reversed, so we still have to rely on some self-control. Whenever you are going to make an impulse purchase, sleep on it and see if you still want it the next day. One of my housemates bought a ‘portable hot tub’ recently and it’s spent the last 6 months in a giant bag under the kitchen table (which hasn’t annoyed me at all!). Although I doubt he’ll admit it, I imagine that he regrets the £150 he spent on it.

Save 10% of your salary - When I didn’t have a concrete plan to ‘put a bit of money away’ I always had some underlying anxiety because I knew I had no real buffer had I lost my job or suddenly had to splash out on something unexpected. Likewise, when people I know started buying houses or going travelling, I began to feel my targets were so far away there was no point in even trying to start saving - so I ignored it. Denial is an effective defence mechanism to avoid facing a problem if you convince yourself it isn’t there. A common book that people cite for helping change the way you think about money is ‘The Richest Man in Babylon’ and while the advice is fairly simple ‘save some money you earn, invest it wisely, acquire your own property (not that easy) etc.’ the narrative helps reinforce obvious advice you might normally ignore. Of all the advice in the book there is an easy place to start - make a habit of saving at least 10% of your salary. I know this isn’t possible for everyone but it is an option for a lot more people than realise it. Sometimes it may feel that savings targets such as buying a house are so far away it is pointless saving and you may as well enjoy life now. I can completely understand that attitude because I had it for years. But, in reality, many people who don’t save can actually afford to save and have fun.

Don’t borrow if you don’t need to- In the FCA Occasional Paper on behavioural economics they reference ‘present bias’ which is where people can have excessive urges for immediate gratification, overvaluing the present over the future. This could mean borrowing instead of waiting until you have saved enough to make purchases outright. If it is possible for you and you follow the 10% rule on saving - you should eliminate the need to borrow and you won’t just receive interest on the money you save, you will not be paying it on what you borrow (double-saving). So this might sound weird coming from a bank but in the majority of circumstances, when faced with the choice, my advice is ‘don’t borrow’. Also even if, for example, you borrow £100 interest free - isn’t that just leaving the future you £100 worse off?

Spend less - Obvious right?! I spend a lot of time researching and finding the best rates for my pitiful savings and I have money moving all over the place throughout the month to try and take advantage of the best savings rates. But with with savings interests rates so low at present, when I get my interest at the end of the month I don’t really get a huge reward for my effort. It would actually be less effort and more beneficial to just spend less. Get the willpower to fight your urges and avoid paying for coffee or cook more often rather than getting takeaways. When I do this consistently I blast my savings gains out of the water (with less effort) but for some reason I don’t pat myself on the back in the same way.


( surohpotsirhC) #3

With the virtual savings pots it would be cool to have your suggestions such as 10% of salary as a standard that you can activate immediately.
Obviously this is with a current account. There’s a lot to be said for making it as friction free as possible to encourage people.


(Michael Jenkins) #4

To quote myself :slight_smile:

I would really like some help from Monzo here, despite having a spreadsheet I cannot work out if I am anywhere near this on a monthly basis.

Additionally, I used the ‘comparison to average spend’ to reduce my spending - before it got replaced by Targets :unamused:


#5

Interesting rule 50:20:30. If you tithe 10% of your earnings to your Church that leaves 90% to divide up rather than 100%, so more like 50:15:25:10 perhaps?


(Michael Jenkins) #6

That sounds like a fixed cost to me, or a long term goal if you are cynical :wink:


(Michael Jenkins) #7

Virtual savings pots have been widely discussed, including round ups etc. However if the pot is easily accessible then it is all too easy to take money back out again. It would be great if there were automatic rules to transfer out money to my premium bonds/nutmeg etc. when the pot reached a certain amount.

I would prefer features to nudge you towards automating good habits much better than a prescriptive approach, such as messages saying “you are spending too much”.

P.s. I am always incensed by the audacity of cash machines to offer me “advice slips”.


(Sacha) #8

I like the idea of virtual savings pots, particularly if they could be combined with gentle persuasion (e.g. get paid and then get prompted with options to transfer 10% or 20% into savings).

There are probably other ways you could guide users beyond just providing spending totals by category each month. For instance, perhaps get on-screen notifications automatically when you’ve spent over a certain amount at a retailer (e.g. Amazon) in the past year. I can click on an Amazon purchase (my own personal weakness!) in my Monzo feed and see I have made 61 purchases totalling £789 since I joined in July, but I would never know that unless I clicked through to see this.


(Kenny Grant) #9

Thanks for the interesting read - I love using a bank that actually cares about how people use their money. You’ve pinpointed the big problem here - people who need advice are not going to set targets or fuss over their spending, they will just spend till money runs out. Those who need goals and budgeting advice don’t seek it out, and more importantly don’t really want it as they know they always run out of money but don’t see a way out of this predicament because when you have little it’s hard to imagine saving have any impact at all. Saving and budgeting is for rich, old people, which is a bit too late.

So advice needs to be automatic, and useful for people who budgets would benefit the most. Some ideas I had on this are:

  1. :hourglass_flowing_sand: People are bad at predicting the future, why not provide them with a time machine which shows them how much the money spent in each transaction would be worth with compounding interest if they saved for 1 year, 10 years and 40 years. So to encourage them to invest the money (something monzo could earn referral fees for while still being ethical), show them directly how much this money would be worth to them in real terms in 40 years. For example if you save this £100 every year, in 40 years this will be worth £8000 to you (in real terms assuming 2% inflation and 5% growth or something like that). Or this daily coffee would over 40 years be worth £5000 in real terms if you saved instead. Again, the key is to make the advice automatic - it should not require configuration, and show it on every item in your list of spending. Savings should be in stocks for the long term, not cash, particularly at today’s pitiful rates.

  2. :money_with_wings: Identify customers having problems by looking at their spending - do they typically get near to zero at the end of a month, do they have any sort of float in savings? If they don’t have spare money, their first priority should be building a pot of say 10% of their salary. Then they can think about saving. Then they can think about investing. There should be stages to the advice, so that you first advise to save a pot, then to save regularly, then to start investing. All that could be done automatically without setting targets/goals etc. Let them start by just saving £1 a day till it gets to something significant.

  3. :trophy: Make it fun - gamify things, give them badges for certain achievements, show them a path to success (budget, save, invest, retire). People love earning fake internet points and meeting goals set for them which give them small simple rewards every day. The rewards don’t have to have any real value, there is a huge boost in just getting a little positive message each day telling you how well you’re doing.

I think all that should be turned on with one button ‘Saving Advice’ or similar, and then all the rules should kick in and it should be automatic. Having complex settings for this just defeats the purpose of nudging normal people (who have other things to think about) to manage their money better.

To support all this, Monzo desperately needs the concept of multiple accounts for customers (even if they are virtual), so that savings can be separated from the main account (a v. popular request on your trello board). This is something that should be top of your agenda IMO (after becoming a bank!) - it’s more important than budgeting or goals as having money in a separate account is such an important psychological barrier to spending it - bonus points if your separate accounts offer interest only if you keep the money in for a certain term.

Does anyone know of a stock broker which is forward thinking, offers an API and easy integrations for partners? Seems like a great fit for Monzo.


(Alex Sherwood) #10

I think those are all excellent ideas.

Companies like Zopa & Funding Circle, for example, have APIs that can be used for integrations. Monzo could partner with them or once Monzo’s API is ready, they (or a 3rd party developer), could simply build an integration / app in order to offer their solutions to Monzo users.

This is exactly what Monzo’s aiming to do via it’s marketplace :thumbsup:


(Stuart) #11

Wow, some amazing ideas on here. I have always liked the idea of the 50/20/30 split (or any variation of that) and also for some people, the idea of ‘jam-jarring’, pots or multiple accounts to help save or budget. I hadn’t thought about the idea of making saving fun or adding prompts or goals etc to gamify the whole experience and I think this could be a really cool feature - the kind of thing that would really work on me!

Alex is right to point out the market place idea and I think something similar could work for things like debt advice too. One of the most painful - drawn out processes in debt advice is undertaking the income/expenditure check and drawing up a financial statement. Largely it’s guess work - without a bank or app that tracks your expenditure who know’s how much they spend on groceries each month? It would be great if we could help pre-fill the financial statement for our customers when they seek debt advice and it would be much better for everyone involved to spend more time talking about solutions rather than how much is spent on milk and bread each month.


(Kenny Grant) #12

Ooh, this would be nice - for debt advice if you could just press a button to email a report in the format that advisors prefer, that would save everyone a lot of time and heartache.

I think perhaps this idea has applications outside of just debt though. Any sort of credit checks nowadays usually require them to know about your expenditure, particularly for large things like mortgages. I’d love to get a report of spending over the last year broken down by the categories banks use on these affordability checks, it’d make things so much easier.

So Spending Reports is perhaps an idea which could be used to generate special reports for lots of different sectors (debt advice, credit card applications, mortgages), and as long as the customer is in charge of giving people access to them, that could be really empowering and save a lot of time for everyone.

PS I keep seeing a 500 error when submitting to this forum, please check logs.


(Siggi) #13

The 50/20/30 essential bills/financial goals&debt/flexible spending split makes a lot of sense. I have used a variation of that for some time and I implement it by having three different bank accounts. One for direct debits having to do with essential bills, one account used for direct debits and manual payments of debt and regular savings/investments and then my Monzo card for other flexible spending.
I avoid using credit cards and use my Monzo card for most things.Like many other people I have unfortunately had my debit card details cloned in the past (although not with Monzo) and used by someone somewhere on the other side of the world. When that happens, it’s a lot easier to handle the aftermath if the same account is not being used for rent, utilities and important bills as for daily expenses. I think this might also be the reason a lot of people like using prepaid cards like the current Monzo card for daily expenses, especially when traveling.

So when Monzo starts offering the full current account, I would really like to be able to have my three segregated accounts all at Monzo and somehow implement this (virtual?) barrier between the three while at the same time being able to see the combined expenses of all to monitor the expense categories and how I am doing in maintaining a 50/20/30 split.


(Fred Morgan) #14

I love the way this topic is being approached in the discussion. Budgeting and spending have been tackled by banks in the past, but in my experience, their solutions have been far too manual to add much value. In order to be of use to those who don’t already have strong budgeting habits, automation is key. Visibility goes a long way and being aware of what’s happening presently is the first step to taking positive action.

A quick thought before I make some suggestions:
Opt-in/opt-out is important. Budgeting and finances can be pretty personal topics. Finances are a common cause of relationship stress. Few would welcome a bank that constantly nags them about their budget/spending habits. Having said that, done well I think this sort of initiative is an opportunity to get close to users and build a partnership helping to achieve their goals.

The central idea that I’m promoting here is intelligent notifications based on transactions/category data. So that users can get visibility of trends, successes, progress toward goals, and tips when things might not be going so well. As a user, when I know that my use of a tool improves the integrity of the data and insight it can provide, my commitment to that tool is greatly increased (Fitbit is a good example, I’m unlikely to ever buy another fitness tracker because of all the historical context that would be lost through years of Fitbit use.)

Some ideas (warning, may be pie in the sky):

  • I really like the way Monzo automatically categorises transactions, it works far better than similar functions I’ve used with other banks. What if the app could give visibility of spending trends with individual historical context? e.g. “Your groceries cost £xx more than last week.” “You saved £xx more than last month/week and your spending on category A/B/C was 10% lower than the past two months great work!” Could it be that data aggregated from a large number of similar users could provide a picture of where someone’s spending on X or Y category sits relative to others?

  • The ability to set a savings goal (e.g. save £xxx for Greek holiday). Include images, progress visualisations etc. have the app celebrate success when monthly/weekly savings goals are met.

  • Income tracking. One of the biggest opportunities to increase savings is when income increases due to a new role/promotion or fixed costs reduce (e.g. rent after a house move, paying off a debt etc.). What if the app could identify this and give suggestions on how a savings goal could be achieved faster through increased saving? e.g. “Congratulations! It looks like your income has increased since [date/month], would you like to increase your regular savings?”

  • Helping gig-economy and freelance employees to manage their finances. Providing average monthly income estimates based on historical data so that users can budget their expenses more accurately. Again, proactively offer updated estimates and suggestions based on reality over time.

  • Fixed cost/bill analysis. e.g. “you pay £xx for your mobile phone each month, 20% more than average. You might consider shopping around at your next contract renewal date.” or “Our analysis shows that your best opportunity to improve savings this month is by cutting spending on [category] where your spending increased by x% last month.” or “Your current [fixed expense] represent greater than xx% of your total income, making it difficult to save. For advice on reducing fixed costs, see [budgeting tool].”

  • [month] marks the beginning of winter, expect your power bill to increase by an average of £xx or xx%.

Accessing insights:
I would suggest user choice where possible. Opt-in/opt-out. Notifications might be useful for some insights, but others may prefer an ‘insights’ area where this analysis might be displayed.


(Michael Jenkins) #15

I find it hard to believe that it is not possible to identify users heading towards financial hardship before they get into serious trouble. Reading the recent fraud blog post, there is a lot of sophisticated data analysis going on which could help E.g. transaction analysis for things such as Payday loans, Lottery, Betting, frequent large cash withdrawals at weekends etc.

Prevention is better than cure i would suggest, or am I missing something on how people get into debt?


#16

there are other causes as well such as expenditure on alcohol, however you are just working on the assumption that people get into debt from over-expenditure on those sorts of categories, while in many cases it is not due to being spendthrift but due to a change of circumstances impacting their budget. Things like job loss, divorce, or a death in the family can trigger debt. Whereas too much gambling may clearly give some advance warning of a self inflicted debt, for others there is no advance warning as the job loss or whatever is outside their control.


(Michael Jenkins) #17

Ahh true, and in those kind of situations 1 on 1 professional advice is necessary, rather than tips on basic budgeting. Two very different scenarios.


#18

I still feel Monzo can give them basic advice on informing all creditors, changing energy supplier, reducing level of Sky package, etc.


(Alex Sherwood) #19

Monzo touched on this idea in one of their recent blog posts -

Sometimes there are opportunities to prevent financial troubles by acting in anticipation.

Take monthly income as a data point from which we can foresee potential financial struggle. If, after a period of stable income, we notice one or more months without a salary paid into your account, our pro-active account monitoring tools could help us be there to support you before your livelihood is seriously affected.

When our system notices that your income has halted, we could send a notification into your feed, in a manner akin to how we hint at different features the users can try. Without accusation or interrogation, a simple prompt may begin the conversation that could ease hardship.

And mentioned @mj84’s suggestion that they personally contact the user -

As part of procedure our Head of Financial Difficulties, Stuart, will also reach out to the customer to provide support and information if needed. Even before that, though, we want them to understand that Monzo is a channel for support, rather than a window to further trouble.

It’s worth noting that a missing salary is by no means a defining factor of redundancy, or furthermore, mental health troubles — but unemployment is inextricably linked to debt problems, as debt problems are to mental wellbeing. One in four adults with a mental health problem are also in problem debt. As you would expect, the more unpaid bills you have, the greater stress impact it has on your life, and greater stress results in a worsening mental state. This is a perpetual, fast cycle, but one that I believe Monzo has a duty to recognise and fix as best we can.


Continue with pre-paid and current?
(Michael Jenkins) #20

Hopefully they don’t reach out to me to tell me I cannot afford to do my weekly shop in Waitrose :joy: