How to Budget
We're not born with budgeting skills yet we are expected to manage our money to ensure we pay our bills on time and that we don't get into a situation where any debt we have we cannot repay without compromising our financial responsibilities and quality of life. Managing your money is therefore critical in order to:
- Pay your living expenses, including your rent or mortgage and utility bills
- Feed yourself and others you are responsible for or who are in your care
- Save, if only a little bit, of money every week or month so that you have a reserve for unexpected things, like a replacement washing machine, or pay towards a holiday or special event
- Plan for your future retirement, such as contributing to an ISA or pension scheme
- Keeps debts to a manageable level
- Avoids money anxiety, which is a major cause of stress and depression
Five Steps to Better Budgeting
- Calculate your weekly and / or monthly income and divide any annual income you may receive by either 52 weeks or 12 months depending on whether you are budgeting weekly or monthly. To note: Weekly budgeting can be easier to manage than monthly; simply because it's easier to go without something for a day than it is for four days.
- Calculate your essential weekly and / or monthly expenses. Include your rent or mortgage, utility bills, mobile phone and internet usage / contract, contracted entertainment costs (eg. Sky package), petrol usage, food, loans, and household essentials. Include annual expenses too, such as insurance and then divide by either 52 weeks or 12 months depending on whether you are budgeting weekly or monthly.
- Now deduct your essential spending (2) from your income (1). This should leave you a credit balance (what money you have left to spend or to save each week / month).
- Then calculate your non-essential expenses. This could include how much you spend on eating out, entertainment (eg. cinema), clothes, holidays, gifts etc. Divide by either 52 weeks or 12 months depending on whether you are budgeting weekly or monthly.
- Now add all your expenses together (2 + 4) and deduct it from your income (1). If there remains a credit, then you have spare cash to save or to invest in a pension. If the total comes in at more than your income, you need to consider where you can reduce your spending so that your income covers your weekly / monthly / annual expenses without the need to borrow money and go into (or get further into) debt.
Tips for Maintaining a Healthy Budget
If your income or expenses change, recalculate your budget. This may mean you have more money to save or to spend, or it could mean looking at ways of reducing your expenses.
- Always check your bank account to make sure your transactions are correct
- Regular checking of your bank account helps you to identify where you are spending unbudgeted money and can keep you on track
- Keep a diary of your spending to keep track of what you're spending
- Write a shopping list before going to the shops – it helps to focus on what you actually need and can prevent impulse buying and purchasing unnecessary items
- Shop around for the best bargains including on-line shopping vouchers and reward schemes
- If you use a credit card, pay it off in full each week or month. It is harder to pay it off in the long-term if you keep paying for things on credit; plus you will incur high interest rates
Do Some Research and Bag a Bargain!
If you're buying insurance, changing bank, need a loan, or switching credit card provider, it's always worth going through an on-line, independent, money expert. You can also sign up for vouchers and incentive schemes that can give generous discounts at many retailers.
Below is a list of useful links that are worth checking out before you get to the checkout!