Where your money actually goes

Contents

• 00:00 — Why every budget you have made has failed
• 06:40 — A plan and a promise are different documents
• 14:15 — The four categories, and why nineteen was always too many
• 23:50 — Fixed, variable, and the third one nobody names
• 34:05 — The gap between what you thought and what happened
• 44:30 — Doing it for one month before changing anything
• 52:10 — What to do this week

Transcript

Yara Mensah: I want to start somewhere slightly rude. Everybody listening has made a budget. Most of you have made several. And they didn't work. Why not?

Amara Osei: Because a budget is written by one person and lived by a different one. The person who writes it is calm, it's Sunday evening, they've got a cup of tea and a spreadsheet. The person who has to live inside it is tired, it's Thursday, and somebody at work has suggested going for food.

Yara Mensah: So it's a discipline problem.

Amara Osei: No — that's the trap. Everyone concludes it's a discipline problem, and that conclusion is the thing that stops people trying again, because you can't get more disciplined on demand. It's a design problem. You designed a system for a person who doesn't exist.

Yara Mensah: What does a system for the actual person look like?

Amara Osei: Fewer categories. That's most of it. People come to me with nineteen categories — groceries, eating out, coffee, transport, fuel, parking, subscriptions, streaming, gym. Nineteen decisions every time you spend anything. Nobody sustains that past week three.

Yara Mensah: How many should it be?

Amara Osei: Four. And I'll be honest that the number four is not sacred. What's sacred is that it's small enough to hold in your head while you're standing at a till.

Yara Mensah: Give me the four.

Amara Osei: Things that leave whether or not you get out of bed — rent, insurance, the phone contract. Things you buy repeatedly and could vary — food, transport, going out. Things that are genuinely irregular but genuinely inevitable. And what's left.

Yara Mensah: Stop there, because I think the third one is doing the real work and it's the one people miss. Say more.

Amara Osei: Right. So everyone knows fixed and variable. Every budgeting app in the world does fixed and variable. And every budget fails in the same place, which is the month the car needs tires, or it's three birthdays and a wedding, or the boiler. And people describe that as "an unusual month."

Yara Mensah: Except there's one every month.

Amara Osei: There's one every month. It's never the same one, which is why it feels unusual each time, but the category is completely regular. If you total those up across a year and divide by twelve, you get a number, and that number is not small, and it is the single biggest reason people believe they are bad with money when actually their arithmetic was just missing a row.

Yara Mensah: I want to go back to something you said at the start, because it is in the show notes and we have not actually done it. A plan and a promise are different documents.

Amara Osei: They are, and almost every budget I have ever been shown is the second one wearing the clothes of the first. A plan describes what will happen. A promise describes what you intend to be like. "Groceries: two hundred" is a plan if two hundred is what you have spent on groceries for the last six months. It is a promise if you have spent three hundred every month and you have written two hundred because it felt like the right sort of number.

Yara Mensah: And the promise fails.

Amara Osei: The promise fails, and then — this is the part that matters — the person concludes that budgeting fails. They do not conclude that they wrote a wish down and it did not come true. They conclude something about themselves. And that conclusion is expensive, because it stops them opening the spreadsheet again for two years.

Yara Mensah: How do you tell which one you have written?

Amara Osei: Look at every number and ask where it came from. If it came from the past, it is a plan. If it came from your idea of a better person, it is a promise. You are allowed promises — I am not against ambition. But write them in a different colour, so that when one of them breaks you know what actually happened.

Yara Mensah: Let me ask about the gap, then. People look at last month and they are surprised. Why are they surprised? It is their own money and they spent it.

Amara Osei: Because spending is not stored as a total. It is stored as a series of moments, and each moment was individually fine. Nobody remembers eleven pounds. They remember a decision, and the decision was reasonable, and there were forty of them.

Yara Mensah: So the total is a stranger.

Amara Osei: The total is a stranger, and it is the only honest witness in the room. This is why I ask people to sort the past rather than plan the future. The past cannot argue with you. You cannot tell last month that it was an unusual month, because last month has receipts.

Yara Mensah: Is there a number you look at first?

Amara Osei: The difference between what came in and what went out, and nothing else, for the first thirty seconds. Not the categories. Just: did more leave than arrived. An enormous number of people have never sat with that one figure, because every tool they have used showed them a pie chart instead, and a pie chart is a picture of proportions. It tells you the shape of the month. It does not tell you whether the month worked.

Yara Mensah: That is quite bleak.

Amara Osei: It is bracing rather than bleak. If more left than arrived, you now know the size of the problem in one number, and a problem with a size is a problem you can work on. What is bleak is the version where you feel vaguely wrong for two years and never look.

Yara Mensah: So what do people do with that number?

Amara Osei: Nothing, in month one. This is the bit I have to fight people on. The instinct is to immediately build the new system, set up the pots, download the app. Don't. Spend one month simply sorting what already happened into four piles. Change nothing.

Yara Mensah: Why not change anything?

Amara Osei: Because you don't yet know what you're changing. Almost everyone I've done this with has been wrong — not slightly, substantially wrong — about which of the four is biggest. And if you cut the wrong one you get a month of feeling deprived, no improvement, and a permanent belief that this doesn't work for you.

Yara Mensah: What's the most common wrong guess?

Amara Osei: People blame the small, visible, slightly guilty thing. The coffee. And the coffee is almost never it. It's usually one large recurring commitment they signed up to when their circumstances were different, and have stopped seeing because it's been leaving every month for four years.

Yara Mensah: What do people do when they find it? The big recurring thing they had stopped seeing.

Amara Osei: Two things, and one of them is a mistake. The mistake is to cancel everything in an afternoon. It feels tremendous and it does not survive, because you have just removed several things you actually valued along with the one you did not.

Yara Mensah: And the other?

Amara Osei: Cancel one. The most expensive one you cannot immediately justify. Then wait a month and notice whether you missed it. Most people do not, and that finding is worth more than the money, because it tells them something true about what they actually use.

Yara Mensah: Is there a version of this that works for someone with no slack at all? Because we have been talking as though there is something to trim.

Amara Osei: That is the right challenge and I want to be careful. For a household where more goes out than comes in and nothing in the four piles is optional, this exercise does not produce savings. What it produces is a number and a shape, and those are what you need to have a conversation with anybody who can help — a creditor, an adviser, an employer. The sorting is not only a prelude to cutting. It is how you stop guessing.

Yara Mensah: So the homework this week is: last month, four piles, no changes.

Amara Osei: Four piles, no changes. And write down beforehand which one you think will be biggest, because being wrong about that is the most useful thing that will happen to you all month.