Many of us have never been taught how to create a budget or been encouraged to learn how to budget our money. There is little wonder that so many now have issues when it comes to managing their household budget.
Budgeting our money is a simple enough concept: we work out how much we have coming in against how much we have going out. So why do so many of us find it so difficult to do? Here is a clear and simple guide:
How to create a budget
Define your goal. Why are you creating a budget? What do you want to achieve? Do you want to be debt free, do you want to save for a house or do you want to plan your early retirement? Defining your goal will help to keep you focused on why you are creating your budget and what your reward will be for doing so.
Gather together all your financial statements, receipts, bills and payment arrangement details. Don’t miss out anything, no matter how small or insignificant it seems.
Work out your total income including sources from employment, self-employment, savings or investment returns, pensions or anywhere else that provides you with an income. Remember to use the figure you are left with after tax (if paid by your employer this should be automatically done for you. If self-employed deduct the minimum 20% you should be setting aside to pay your tax bill or remember to work it into your budget as a monthly expense). This will be the figure that you have to work with each month.
List your monthly expenses. You can create a budget spreadsheet, use a budget template or just use a notebook to record your budget plan in. You may find it easier to divide your expenses into ‘needs and wants’ categories, for example necessities that you must pay every month without negotiation such as mortgage/rent, utilities, food are your needs. Clothing, entertainment, satellite TV subscriptions – they are your wants.
Some categories such as your vehicle expenses will have several expenses within them. Remember to allow for fuel, tax, MOT and servicing costs, and insurance. You may also need to add another section for general travel expenses if paying out regular parking fees or public transport costs. Don’t forget to include these too.
Add the total cost of all your monthly expenses together. This is the figure for your expenditure. Subtract this figure from your total income to work out what your outgoing cash flow is in comparison to your incoming money. If your income is greater than your outgoings you have a great starting point to work from in making your money work better for you. If your outgoings are greater than your income can cover, you need to get serious and deal with your debt.
If your expenses are higher than your income, you’ll need to cut back on your expenditure in order to balance it out. Can you get rid of any luxuries? Do you have a gym membership you rarely use? Or a satellite TV service that you could reduce to a cheaper package? Can you reduce your mobile phone costs? Cut out any luxuries you can. You can always reinstate them when your budget is in better condition or you may even realise that you can live without them.
Make sure you’re getting the best deals on your ‘needs’ category. Are you paying the cheapest tariffs for utilities (click here to compare gas and electricity prices)? Have you received several quotes for your car insurance?
If you are still having difficulties balancing your budget after cutting the luxuries and reducing costs as much as possible, you need to take steps to tackle outstanding debt.
Keep your budget going. Make a conscious decision to log everything you spend, every bill that comes in and every penny you pay out against each month’s income, every month. You will soon be able to see where money is being wasted and where it could be better distributed. Awareness – no matter how shocking or painful it may be – is the key to financial success!
Click here for a budget sheet template which you can use for inspiration or download to adapt and use yourself.