When we first started out, we really underestimated the power of budgeting money. A well thought out budget allows you to understand your finances easily and enables you to allocate money to the correct places and avoid money pitfalls like falling into debt.
When we created our first budget, i was shocked to see how much we were actually spending on unnecessary things like eating out and new clothing. I know that them things are nice to have but it’s imperative you know what you can buy without breaking the bank! We managed to lower our budget to £955.00!
If you’re new to budgeting, don’t worry. This is a beginners guide to budgeting money the easy way, infact all budgets are pretty simple and follow these same premises so using these methods is a great way to manage your finances short term and long term.
Before you set out to create a budget, you want to explore the goals you want to achieve. Whether it is saving up for a home, paying off credit card debt or getting ready for a new baby.
Some examples of goals may be:
- Save £500.00 emergency fund
- Pay off £1200.00 credit card
- Save a 10% house deposit in 2 years
- Buy car with cash next year
- Save £2000.00 for maternity leave
Determine your income
The next step is working out your own or household income. Add together your monthly salary, side hustles, tax credit or anything else that factors into your monthly income.
Make sure your income only includes your actual take home pay, always deduct income tax, pension contributions and national insurance. Your total take home pay is also called your net income and this is what you want to use when creating a budget.
Record your expenses
Keeping track of your expenses and writing them down is a major part of any accurate budget. You want to ensure this is correct, you can do this by going through your last 3-6 months bank statements. You also want to be aware of any bills you pay on a yearly basis that may not be in your most recent statements.
You want to categorise your expenses so you can later determine what you may be overspending or underspending on. I like to categorise my expenses in this way.
In your housing category you want to include bills like your rent / mortgage, council tax, insurance and average repair costs. You may not have an accurate repair cost for your home but it is worth budgeting a sinking fund in case of emergencies like calling out a plumber or a locksmith.
Bills like electric, gas, water, internet and phone should be under your utility category in your budget. Average out these bills and bare in mind that over the winter period your electric, gas and water may increase considerably due to staying in more and using the heating system often.
Often one of the most expensive part of your budget, but also a necessary one is transport. If you do not drive you want to add your public transport costs such as bus, train and taxis. However if you own a vehicle you may include your car payment, car insurance, fuel and repairs. You can also add your MOT and service charges to your budget (divide the yearly cost by 12).
You would be surprised how manys peoples budget is increased by their food spend. You want to add your regular weekly shop cost and also add your spending on eating out and takeaway food.
Be honest here, many people do not add the true costs of eating out or their food budget as it can be stretched out over multiple days and weeks. Do you purchase coffee while at work or a daily meal deal? Make sure it all goes into your budget.
This may be considered as the more interesting part of budgeting money, it’s basically your ‘fun money’. You want to add entertainment, clothing, cosmetics, mobile, toiletries, childrens supplies and any thing you can think of. Include your subscriptions to things like Netflix, magazines, gym membership and whatever you subscribe to on a monthly basis.
Depending where you live you may need to allow for actual medical treatment. Other things to consider here are life insurance, dental, medications, travel insurance and private healthcare.
If you donate to charity on a monthly basis you want to make sure to add this to your budget also. While on the subject of giving, for a really accurate budget, work out what you spend yearly on gifting for christmas, birthdays etc. and divide this by 12 and add to your budget.
This is normally the category people are avoiding the most. It’s important when creating a budget, it is normally one of the more important categories. Include all your debts including ones such as personal loans, car payments, credit cards, store cards, fines or any other debts you may have.
Assessing your budget
Now you have worked out all of your monthly expenses and your net income you can assess your budget and see what state of your current finances are in. You want to compare your total income to your total outgoings. You will find one of 2 things.
Negative budget total
This would mean you currently spend more than you are earning and you are living beyond your means, This will point out that at the moment you need to drastically adjust your spending habits.
You can go through your categories and lower your bills on paper, making sure that your changes are actually achievable. Here are 52 ways you can save money that actually work to help you reduce your spending.
Normally, food and personal spending are sure fire ways to reduce your spending and bring your budget into line with your income. If you are way over your head, consider stopping charitable donations until you sort out your finances.
Positive budget total
If you are making more money than you are currently spending that’s great. If you have spare money after everything is payed, that’s even better. Consider contributing to your savings or investment such as retirement or paying down debts faster to save on interest.
It doesn’t matter what state your finances are in at the moment. What’s important is that you know what your budget really is and what you can do to change your current financial situation. That’s what’s great about creating a budget, it is a constant reminder and helpful aid whatever situation you find yourself.
Good luck with your own budget! As always, Live more by spending less!