Guide: How to Budget Properly
A budget is an easy way of keeping an eye on your finances – it’s basically a spending plan that incorporates incomings and outgoings to provide an overall perspective on what happens to your money each month. A budget is essential if you have spending goals, such as paying off debts or saving for something specific, and it’s an important part of learning to avoid overspending.
Why bother with a budget?
A budget is really the only way to make sure that you’re living within your means. Without a budget you will have only a vague idea of what your incomings and outgoings are and that lack of information means your finances can easily end up in the black. It’s important to check in with your budget regularly, to make sure that it incorporates your current spending habits, and ensure that you’re being honest about what your outgoings really are. Sometimes it’s a bit of a shock to see how much you’re spending but the budget will only work if it reflects reality.
Where do you start?
The first place to begin with budgeting is informing yourself about your finances. You need to know exactly how much you spend every month, down to the last penny, as well as what your regular income is. Collect bank statements from the last couple of months, as well as credit card statements and utilities bills. Get your pay slips together, as well as details of any savings that you have and don’t forget less regular incomings or outgoings.
What’s your income?
This is probably the easiest place to start, as most of us tend to have fewer sources of incomings than outgoings. Make sure that the income you’re looking at is a figure after tax and National Insurance contributions have been deducted and don’t simply rely on regular monthly incomes but incorporate those that are more or less sporadic too. Create streams for the earnings that come in at different times and record these in different columns in the income section of your budget. Make sure you also have an overall grand total for your entire annual income, as this is a useful perspective to have too.
What are your outgoings?
This is the toughest bit of budgeting, as not all outgoings are regular payments and some are difficult to anticipate. You need to make a note of every place that your money is leaving your hands, so go back through your bank statements, credit card bills and receipts and follow your spending. You can divide outgoings into those regular monthly payments that you’re likely to continue to make, such as mobile phone bills, rent or mortgage, gas and electricity, as well as the payments that are much less regular, for example meals out, drinks and entertainment. Look at every area of your life where you might be paying out money for a part of your lifestyle, whether it’s a gym membership or car insurance.
Add up the regular monthly spending first to give yourself an accurate picture of your basic monthly costs. If you’re trying to figure out how to take account of basics like food or transport – that aren’t necessarily the same amount each month – then add all these costs up over the course of the year and divide the total by 12 so that you have a rough average of how much these are costing you per month.
Next, add up the more occasional spending to give you a second monthly total – this will be different month on month but should generally work out at a pretty much similar amount, as most of us are fairly habitual. Finally, take all your totals and add them together so that you have a grand total of all your spending over the entire year, both the regular monthly payments and the occasional spending. If you divide this by 12 then you’ll have an amount for each month that represents an average of what you’re spending. This might surprise you – for most of us it’s often a lot more than we are expecting.
You now need to take a look at the figure for average monthly income and the average monthly outgoing figure and compare the two. Doing this could well reveal where you have been going wrong – for example, if your incomings are a lot smaller than your outgoings then that would explain why you never have any spare money and keep having to borrow. It’s also a good idea to look at the difference between the annual totals too – this might be an even bigger shock but it will start waking you up to the fact that your finances aren’t right if you’re spending more than you earn.
Even if you have more money coming in than going out, budgeting is an easy way to keep track of that money so that you don’t waste it. You might find that you want to create a plan for saving or investing and to do that you’ll need to know how much to transfer to which account each month – that requires budgeting to achieve it.
Now that you’re armed with all that information it’s time to make a plan to get you to the next step of your financial journey. Whether this is cutting back to make your finances more balanced or keeping better control of your income to create a savings pool, the plan is the key for getting from here to that savings goal successfully. Firstly, identify that goal – is it debt repayment, savings creation, investment, putting more into a pension, saving for a deposit for a house? The motivation of knowing why you’re budgeting is key to the plan being successfully completed.
It’s important to remember that small changes can make a big difference and will really add up – for example, taking your own lunches to work rather than buying sandwiches each day, or avoiding takeaway coffees, can save you a significant amount over the course of a year. Set yourself a realistic daily spending target that will both help you achieve that financial goal and also still mean you can live your life. It might require a few changes, or a new kind of discipline, but it will be worth it when your budgeting plan is successful and your goals are achieved.