Do the names Monzo, Starling, Atom Bank and Revolut mean anything to you?
I often discuss with my clients how these type of digital banks help make money management more accessible and fun than a traditional bank by using your smart phone to track your spending.
These digital banks offer easy-to-use budgeting tools, instant notifications when you spend and straightforward ways to save. And this is all available at your fingertips, via your mobile phone.
They’re also helping to create conscious, mindful spending.
Credit cards could more accurately be referred to as debt cards, as they make it easy to rack up debt and forget how much you’re spending when your bill doesn’t come in for weeks.
With some of these digital banks, your mobile phone pings at you, in real-time, to notify you of each bit of spending as it occurs. The clarity and transparency of this makes for conscious, mindful spending and that’s why the idea of using one of these banks comes up so often in coaching sessions.
Some people choose to move their banking over to a digital bank entirely. Others use their existing bank for direct debt, standing orders and other bills, then set up a secondary account with one of the digital banks for discretionary spending - things that come up most months, like food, clothes, eating out and entertainment - but vary in amount. That way, they can pay themselves a set amount each month for these types of spends and easily monitor how well they're sticking to the plan.
Sticking to a plan
Whenever you make a purchase with one of these digital banks, they automatically track it in one their 13 or so categories of spending, such as groceries, eating out or travel. That way you can set budgets for different categories and easily and effortlessly track spending against each type of spend. It makes sticking to a plan easy and, dare I say it even fun! You can set up pots, name the pots and even attach a photo.
I find clients who have never managed to control their spending using these types of accounts and pretty quickly starting to feel in control.
An old fashioned style of managing money that people still successfully use, is to stash away a set amount of cash each month and split it into different envelopes for things like food, clothes, entertainment etc. That way, you can only spend the money that's left in the envelope for the month. Simple to use, but relies on us having pots of cash at home. The new digital banks allow you to do something similar via their app, by stashing away money in pots. If you then withdraw from the pot before making a purchase, it means you can easily track the spending from that pot and stick to the limits you set. You can even set up a regular pre-load of each pot with a certain amount of money at the start of each month, so you don't have to remember to do this manually.
Managing discretionary spending
If you prefer not to budget in this detailed way, you could simply pay yourself a weekly or monthly amount into your digital bank account to cover all of your discretionary spending and you'll see each time you glance at the app how much is left to spend for the month. You can also monitor spending against set goals for each spending category.
Start by looking back at your finances to see the different areas of discretionary spending you have. You can then put a plan together of what you’d like to spend in each area from now on.
Managing occasional spending
Your partner’s birthday that comes with a present to buy and a celebratory night out; the holiday booked for the summer; your car insurance policy, MOT and service; Christmas… these are all things we know about in advance but often fail to account for until the moment is upon us.
Digital banks allow you to spread the cost of occasional spends by creating pots of cash to stash away money each month. That way you’ve got money saved to cover these types of spends when they arise and avoid the need to use credit cards. Some digital banks even allow you to lock your pot to stop yourself dipping into it.
If Christmas is likely to cost you £500, then planning ahead to save around £40 a month from the start of the year is better than trying to find £500 in December.
‘Sweep’ your spare change into savings
The ‘sweep’ feature acts like a digital piggybank or coin jar.
It allows customers to round up transactions and ‘sweep’ the spare change into a savings pot. For example, you can set it so that if you’ve spent 80p, the app will round up the transaction to the nearest pound and sweep 20p into one of your savings pots.
For people who have never saved money, this can be a good way of starting to save small amounts and see those savings grow over time.
As a financial coach, I work with people who want to change their financial results. This usually involves helping them change their behaviour with money and form new, positive habits that requires small and consistent action. Small, because it’s more achievable; consistent, because this helps habits stick.
The ‘sweep’ feature helps customers take small and consistent action.
One client of mine who has been using a digital banking app to help manage money better messaged me recently to say: “I’m within my set budget for the month with a few days to go and it feels great.”
Check out the following articles to find out more about these types of accounts:
Not all digital-based banks are fully licensed banks. Ones like Starling Bank, Monzo and Atom Bank are all protected by the Financial Services Compensation Scheme (FSCS) meaning that your money (up to £85,000) is protected should the bank go bust. Others like Revolut hasn't yet become a bank so doesn't currently have that protection.