Few things hit quite like the return to reality after a blissful holiday. First, it was first the torment of the massive passport queue at 1am. Then came the anxiety, dread and shame attached to consuming endless Portuguese seafood platters and how much that could have set me back in the gym (sorry to be one of those people). And then the big one: the dread of opening my banking apps to check just how much I’d overspent.
Of course, feeling shameful is useless – the money is spent and the pastel de natas are gone, and no amount of worrying will change this fact.
In an attempt to offer myself (and anyone else currently thinking about looming credit card payments for a summer of leisure gone) some compassion, I've been thinking about the 80/20 approach, often used to maintain a healthy attitude to eating well.
As a rule of thumb, it's not worth fretting over the 20% of indulgence, as long as the 80% is relatively good. Yet with savings, and spending them, we still seem married to the all-or-nothing approach. You're only financially responsible if you save consistently every month – and that money should be invested forever. Talking about spending any of it on something making you happy implies poor judgement, inconsistency, and a reason to be shameful.
Advisers with years of experience might disagree but I believe the 80/20 mentality can be useful when managing your personal finances too. Yes, I did spend more than I planned on holiday – but not all of my savings. I’ll be paying my credit card bill and return to saving as soon as the debt's cleared. It is broadly fine. Of course, with this comes a level of privilege, of being able to save a bit every month, of being able to afford a week abroad. But the shame of spending beyond my budget still feels very real.
For the purpose of the article, I’m ignoring the fact that the 80/20 principle is originally an economic one, but one that argues largely the opposite of my point; that 80% of results stem from 20% of effort (the so-called Pareto Principle). Instead, I'd like to say that if you are sticking to your savings goals and paying down any debt 80% of the time, then you shouldn't let occasional overspending weigh too heavy on your conscience.
If you're of a more optimistic disposition, you can also view overspending as a great opportunity to review your savings goals and targets. My personal approach is slightly more anxious: I don't want to blow the budget again this Christmas. I've got destination weddings to attend next year (I wonder how they are saving for this). If I blow the budget again, how will this affect any long-term savings and getting on the property ladder? Will I even be able to retire before the age of 95?
As such, I’ve split my financial goals into four, by time horizon:
1. The short-term treats, like holidays and visiting my family abroad;
2. A rainy day fund. Experts typically advise having at least three months' salary as a rainy-day fund, though some people may be more comfortable upping that to six months;
3. House deposit. A big goal that will take some years, the easiest first step here is to determine the size of deposit you need and when you hope to have it and work backwards from there: with some savings accounts offering around 6% these days, it's much easier (and faster) to reach your goals without taking too much risk;
4. Retirement. I’m letting my workplace pension take care of this and hope for the best (more on that below).
Three-Part Process
Future overspending is inevitable, and so I looked back at our own video on how to start saving – maybe the solution is to save more upfront. The traditional rule is think of your salary in three parts: 50% should go on needs, things like rent, groceries, electricity, the things you really have to pay for. Another 30% is for the things you want and make you happy, like shoes, restaurants, or another custard tart. The final 20% is savings.
A few taps on a calculator made it clear that I'm some way off this split. If I want to improve my savings, I will need to cut down on my wants. Last month, we collected multiple ways to combat impulsive spending, both from Reddit (advice of varying quality) and from our own experts. Some of these include cutting down on skincare (absolutely not), but Morningstar’s former behavioural researcher Sarah Newcomb has pointed out doing the math and determining your golden ratio will make it easier to stick to your goals.
Still, the easiest savings are the ones you don't have to think too much about. I’d like to spend as little time thinking (worrying) about my savings as possible. My colleague Andrew Willis' tips on tricking yourself into saving more come in handy here. Direct debits and roundups are of course the easiest way to simplify the process and assign it to some remote part of your mind – out of sight out of mind, etc. I'm grateful for auto-enrolment into a workplace pension scheme and not having to invest any time into knowing I am invested in my future (aside from occasional inflation dread).
The rest is all about those healthy habits, consistency, commitment. It may be easier said than done, but if I can stick to this 80% of the time, then I believe that’s something to be proud of. When Jill Schlesinger, author and business analyst for CBS News, joined Morningstar’s podcast The Long View earlier this year, she said reviewing your spending is embarrassing, but that you should try not to judge your "fun" spending.
"Sometimes I’ll tell people to cut back on the analysis and have some fun and spend your money," she said.
"Because life is short, and that you want to have some fun and you want to have fun along the way. So, what works for you, works for you, and I don’t have a preference one way or the other."
On that note, I’ll face the music and sign up to a spin class, too. Stay tuned for another spending confessional next January.
Sunniva Kolostyak is data journalist at Morningstar, based out of its London office
