The art of lending yourself money

Martin Tanner, 24th February 2024

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The principle of setting money aside for a specific item or event is nothing new. For decades (most likely centuries) people have used the principle of pots or envelopes: a way of ringfencing money until it is needed, ideally in a secure location so that it can't be accidentally spent on something different. This approach has enabled generations of individuals and families to save up for holidays, Christmas, birthdays, a new car, a house deposit and many more exciting things. And now the approach is trending across Tik Tok and Youtube - check out #moneystuffing or #moneyenvelopes Of course, this very same principle lies behind the success of many finance apps and tools - including iBudge.

The discipline remains the same, regardless of whether the money is set aside in a physical pot, or a virtual pot created through logical segregation within a database. The key is to have a clear understanding of the final amount that you will require, along with a defined period over which you need to save. If you plan to spend £6,000 every year on a family holiday then you need to set aside £500 per month - it's pretty much as simple as that. Of course, some people see fluctuations in their income and therefore need to plan for some months to deposit more, with other months crediting less (or even not contributing anything). But, fundamentally, the simplicity of the process is why it is so successful for so many people.

But what if you unexpectedly need money? Or even just really want to purchase something? Should you lend yourself money from your savings pots, or leave them untouched? The answer isn't a simple “yes” or “no”. Instead it depends if you have established a structure that allows you to lend yourself money. This relies on some forethought - and realistically it does rely on you being fortunate enough to have a small amount of wriggle room with your finances. If you are truly living each month without any discretionary income (i.e. money that you can spend on non essential items) then you will need to be stricter in the way that you protect the money that you have set aside.

But what if you unexpectedly need money? Or even just really want to purchase something? Should you lend yourself money from your savings pots, or leave them untouched?

If you are in a position to benefit from the art of lending yourself money, then the following tips provide a framework that you can follow for success:

  1. Ensure you have a long term savings pot. Most of your pots or envelopes will have a due date assigned to them. The point in time when you need to pay for the holiday, put down a deposit on a new car, or pay for all those Christmas presents. If you want to benefit from the ability to lend yourself money then you also need a long term pot that doesn't have a due date. This gives you the flexibility that you need - but it is essential that you regularly add money to this pot to keep it topped up. Generally speaking the total negative value of your red pots should be significantly lower than the positive value of your long term savings.
  2. Ensure you have a repayment plan. If you lend yourself money from another pot it is essential to consider how you will repay it. If your income is variable (perhaps seasonal work or an occasional bonus) then times when your income is higher may well be the solution. Alternatively, you may be forecasting a period when your expenditure from your savings pots will be lower. This is also a valid option to then rebalance your pots. In emergencies, or for very specific reasons, you may choose to permanently move money from another pot (perhaps your long term savings) into your red pot - but this should be carefully considered and should only be a very occasional solution.
  3. Always stay abreast of how many red pots you have. A red pot, quite simply, is a savings pot where you have spent more than you have allocated. Fundamentally, the principle of lending yourself money is sound - but only if it is done in a controlled manner. It is very easy to get carried away and pay little attention to the number or red pots you have. Before you know it, you have too many pots with a negative value, a large payment becomes due, and you don't have enough funds to pay it. As per the first point, your objective should always be that the positive value of your long term savings pot should be significantly greater than the negative value of your red pots.

Where pots are either green or red, it is easy for your eyes to be drawn to a green pot with a healthy balance and assume that everything is OK. This is why iBudge provides immediate visibility of the total value of all your savings pots (a blend of positive and negative) as well as the value of your red pots at a glance on your status page.

  1. Pay attention to the total value of your negative pots. It's not just the volume of red pots that matters - it is also critical that you track the total value of these pots. Whilst a long term savings pots is a key component of the art of lending yourself money, it can also provide an illusion of having more money than you think you do. Of course, in the traditional model of physical envelopes you would have to literally take the money out of one envelope and put it in another. Whilst this lacks the inherent flexibility and agility of tools like iBudge, it does have an advantage that the money is physically moved. Where pots are either green or red, it is easy for your eyes to be drawn to a green pot with a healthy balance and assume that everything is OK. This is why iBudge provides immediate visibility of the total value of all your savings pots (a blend of positive and negative) as well as the value of your red pots at a glance on your status page. Keep an eye on this value and ensure it is never greater (ideally much less) than your long term savings.
  2. Revisit your budget if you keep lending yourself money. Generally speaking, the art of lending yourself money should only be used for occasional requirements. A large purchase (a car, a house deposit, a special holiday, a wedding etc.) or an unexpected expense (a boiler replacement, a big car repair, health treatment etc.) If you are regularly relying on lending yourself money for day-to-day expenditure (clothes, haircuts, recurring costs) then you almost certainly need to revisit your budget.

Ultimately, the key is a sustainable solution for your money that is adjusted based on your income. Of course, its easier said than done - and sometimes there are difficult decisions that need to be made. But it is essential to set out on your journey to financial security with the right intentions.