Managing Your Money Through Budgeting

The word “budget” isn’t an inviting topic for most, it conjures up thoughts of no fun and the unpleasant task of crunching numbers. The good news is, this couldn’t be further from the truth.

A budget is not there to stop you from indulging in creature comforts, it’s not supposed to suck the fun from your life. It’s there more than anything, to make you more financially secure. Making a budget isn’t difficult either, if you know how to approach it. 

What is a Budget?

A budget simply lets you know how much money you have coming in each month compared to how much money is going out. When you think about it, how could a business become successful if it didn’t keep track of its income and expenses? Well, it’s the same principle when it comes to your personal finances.

Without a clearly defined budget and a plan for managing your spending each month, your road to comfort could be a lot bumpier than it needs to be. If that doesn’t sound like a fun ride, keep reading!

When people think budget, they immediately look at their leisurely spending, and fear that they’re going to have to let go of it all – things like the occasional coffee or dinner out, movie night, or even the trip to grandma’s for the holidays. This is a misconception – which is great news because now you get to see that budgeting is not a punishment, it’s merely a very handy tool.

Although this doesn’t mean that you won’t get a reality check when you do finally make a budgeting plan. While you should still get to enjoy yourself, if you’re spending money on days out without thinking about whether you’ll have enough money for food by the end of the month… That’s not good!

Either way, without actually sitting down and creating one, it is impossible to know what expenses need to be cut, if any. However, you shouldn’t allow the fear of having to curb your spending a little stop you from taking control of your money and in the long run, having a more rewarding life. 

Calculate Your Income

You will first need to find out how much income you receive each month. Generally speaking, this is quite easy to figure out as it is your income after tax on your payslip. If you are married or have a partner be sure to include their income as well. On top of your regular pay, there could be other sources of income that you receive, for example dividends, interest, renting a room, a side business you run etc. It might look like a bit of a jumble at the beginning, but once you get the numbers together, everything will look so much clearer!

Now, don’t worry if you’re a freelancer or self-employed, we haven’t forgotten about you! In your case, you’ll have to use the law of averages to determine your income. Calculate the average monthly income you received for the past year. This will give you a baseline income to use for your budget.

Track Your Monthly Spending

The next part of the budgeting formula is summarising all of your monthly expenses. You should start with your regular and fixed payments, for example your mortgage/rent, bills, car payments, insurance any debts and so on. As these expenses tend to remain the same amount month to month it can make planning your budget much easier.

After that, it’s time to dig deeper to find out where the rest of your money goes. This is the part that makes people uncomfortable, but keep going, you’re doing great! Pull up your latest bank statement to help you with this step. Note down how much you spend on things like food shopping, entertainment, subscriptions, clothes and so on.

Create Your Budget

Once you have your income and expenses totaled up, the next step is pretty easy, promise! All you need to do is subtract your expenses from your income. 

From here there should be some money left over. This money shouldn’t be used for spending if you are committed to the budget, so don’t rush out for a shopping spree just yet. This money can be used to build up your emergency savings fund, reduce any debt you may have or fund another financial goal (upcoming wedding, new car, moving to a new house).

This might sound dull – after all it’s not an immediate reward. But it does lead to you living a much more stress-free life in the long run, which makes a lot of things less scary – and more fun! You’ll know that if your car breaks down, you won’t be stuck in the mud for long – you can afford to get it fixed immediately!

If you do end up with a negative number after you have done your calculations (spend more than you earn) don’t panic. This budget will help you identify where you are spending a lot of your income on, allowing you to alter your spending habits accordingly.

This could mean joining a free running class and stop paying for the monthly gym subscription. Or eating out a few times less each month. By just saving a few pounds each week can quickly add up to help you pay down credit card debt or overpay on your mortgage.

Once any issues squeezing your income have been dealt with, you can build up a reserve, and start putting money into your retirement savings. This helps keep your stress down in the really long term!

Remember to review your budget each month and take into account any changes in your income or expenses. Your budget should be designed to evolve as your financial situation does, so you can create a healthier bottom line.

If you need some help with budgeting and savings, get in touch with us on 01609 760960. Or arrange a call back and one of our advisers will be happy to help.

Reference – BL077 – Aug – 2019