I realised that I have the tendency to naturally spend my money based on how much is left on my bank account (keeping a small reserve) rather than spending for what I really need.

To solve this, just detach your spending-budget from your savings.

In order to be able to optimise my expenses (Level 2: Reduce your expenses), I did the following:

Create a Budget

Use a simple spreadsheet to define your expected savings and expenses on a yearly basis. I use the following categories and define the amount I think I will have to spend upfront (I guess if I don’t know the precise number):

1. Saving
   1. Savings account
   2. Private pension (3a)
   3. Investing
      
2. Income related expenses
   1. Income-tax
   2. Lunch at work
   3. Commuting cost to work
   4. Childcare
      
3. Living expenses
   1. Rent
   2. Household & Groceries
   3. Electricity and Water
   4. Internet & Mobile
   5. Hairdresser
   6. Clothes
   7. Insurances (Health, Liability, Legal, etc.)
   8. Health (dentist, medicine, deductible etc.)
      
4. Luxury
   1. Car (inkl. car-taxes, car-insurance, fuel, maintenance, tires etc.)
   2. Travel/holidays
   3. Leisure (eating out, concerts, etc.)
   4. Sport (gym membership, bicycle maintenance, sport wear, etc.)
   5. Gifts (for myself and others)
      
5. Reserve
   1. 5% of the total budget for unplanned expenses (pick a number which makes you feel comfortable)

How to make a budget work?

I use a pretty old technique called mental accounting. The old form of it was to distribute your salary (which you got in cash back then) into jars in your kitchen. Every jar would have a sticker on it with the according budget position. Doing so, you would know how much money would be available / planned for that expense and if you would go doing groceries for example, you would only take out money from the groceries jar. And of course you could make exceptions and borrow from an other jar, if the allocated money wasn’t enough – so the old system was simple but still flexible.

Many FIRE-nerds use tools like YNAB or similar to count / allocate every penny they spend for every budget position which is time consuming and in my opinion very annoying & stupid. I looked for a modern version of the jars which had that flexibility but not me required to count pennies.

This is my personal system which i use since 2017:

1. Install a transit account
   1. Ensure that every incoming cashflow goes to this account (salary, bonuses, tax payback etc.)
   2. I use the private account from the bank cler, it costs me 1.- per month
      
2. Create virtual jars per budget item
   1. Use a second, not-connected bank account where you can create subaccounts (jars)
   2. I use the account called Zak from the bank Cler, it has the jar functionality implemented and lets you pay bills directly out of the jars (many banks offer a similar functionality). Zak is free and you get a VISA debit card to pay everything.
   3. If you want to use ZAK too, use my referral code after you sign up and get 25.- for free. Link for signup / Referralcode: G6LLSC
      
3. Create standing orders
   1. If you can pay the cost directly and the amount doesn’t change often, pay it directly on a monthly basis from your transit account (rent, 1/12 of the yearly taxes, health insurance, etc.)
   2. If you can’t pay the costs directly or the amount changes often, create a standing order to your separate account and make sure its saved in the according jar (subaccount) automatically (can be solved with a function called regular saving)
      
4. Spend according to your jars
   1. Before spending, be sure or check quickly the according jar to know how much is available
      
5. Assign every transaction to the according jar
   1. With Zak it takes one swipe and two clicks per transaction
      
6. Review and update
   1. Check your budget/jars regularly (I do it every 6 months).
   2. If you keep overspending on one jar, you should either optimise the spending there or increase the budget
   3. If you keep underspending on one jar you should reduce the budget position and save more

What is the impact of that?

For me, it changed a lot:

1. I can ensure that the amount I want to save is saved at the 1st of the month and not “if something is left”
2. I know how much money I spend for what
3. I have financial stability due to the planning (I never had the situation where a bill comes in and I don’t have the money to pay it)
4. I am conscious where my money goes and can change it if I am not satisfied with it

If you have any questions, feel free to use the comment section below. If you haven’t done the level before, I recommend you to do it first: https://giles.money/fire-handbook/