Budgeting just means figuring out how much you’ve got to spend and what you want (and need) to spend it on. All of us do it to some extent, even if it’s just as simple as knowing when you get paid and when your utility bills are going out and making sure you have the funds available.
However, some people are better at budgeting than others. Having a good idea of how much you have to spend is important, as it helps you keep track of where your money is going and stops you going into an overdraft at the end of the month. As business tycoon John D. Rockefeller said: “I believe that thrift is essential to well-ordered living and that economy is a prime requisite of a sound financial structure, whether in government, business or personal affairs.”
If you find it difficult to manage your budget effectively, fear not: we’ve put together the ultimate guide to budgeting.
Working out your budget
First off, you need to figure out how much money you’ve actually got coming in. This is your household income less income tax, National Insurance or pension contributions and any student loans payments you may have. It could also include any benefits you receive, any regular bonuses or overtime payments, or any family contributions.
Next, you need to write down any priority bills that you’ll have going out over the month. These can include utility bills, rent or mortgage payments, council tax, childcare, all insurance payments, and grocery bills. You’ll also need to note down if you’re paying off any credit agreements, debts or credit cards, as you’ll have to factor these into your budget too. Don’t miss out any irregular bills, such as TV licence payments, which typically only come round every quarter.
List all other outgoings over the month: including travel, mobile phone use, any money you spend on coffee or food at work, clothes, going out, or entertainment. Be honest here – there’s no point in pretending you only spend £10 a month on new clothes when in reality you know it’s closer to £100.
Lastly, you also want to put anything you’re saving up for long-term, such as a holiday or Christmas presents. These costs are easier to manage if you set aside a bit for them every month, rather than having to fork out for them all at once.
If you’re constantly stretched at the end of each month, you may want to think about cutting back on a few luxuries. Your budget will help you with this, as you’ll be able to see where all your money is going, and what you can afford to reduce your spending on.
US Founding Father Benjamin Franklin said: “Rather go to bed without dinner than to rise in debt.” Whilst we don’t advocate not eating – and groceries are classed as an essential living cost – a more reasonable goal is to see if there’s any way you can save money on your groceries by shopping around for a better deal. You can also look at cutting back on a few smaller payments you make over the month, as these will all add up. For example, take your own sandwiches and coffee to work instead of buying expensive refreshments and snacks there.
You need to decide what your priorities are. A gym membership may seem like an essential to you if you love exercising, but drinks out with friends might be less important. You may not have to be too frugal and not allow yourself any treats – just be sensible and factor in to your budget what you can afford.
Stick to your guns
You might find it difficult to know how much you spend in the first few months. That’s fine – if you write down your predictions at the start of the month and then make a note each time you spend money, you’ll be able to see how close you were at the end. Don’t be afraid to adjust your budget; you might have drastically overestimated or underestimated one of your expenses and the first month or so is a learning curve.
As American author William Feather said: “A budget tells us what we can't afford, but it doesn't keep us from buying it.” Remember, the only person who will keep you on your budget is you. Try to stick to spending the allocated amounts for each expense. It can be hard at first, but you’ll find it easier to keep control of your finances if you keep your spending within your budget.
If you’re finding it really tough to stick to the budget you’ve set, try encouraging yourself with short-term motivations. For example, if you manage to keep to your budget for the month, treat yourself to a new DVD or a takeaway with some of the money you’ve saved. It might seem simple, but just a few little things can really make the difference when you’re on a tight budget.
Managing your budget could be easier if your account offers ways to help you keep track of when money is going in and out. For our Personal Account customers, Money Managers could lighten the load by helping you set aside enough of your income to cover your regular expenses.
Knowing when to spend
Cutting back and getting the cheapest of everything isn’t always the best way to save money in the long term. For some things like clothes, appliances, or furniture, it could be more cost efficient to save up and buy quality products, as these usually last longer.
However, sometimes this just isn’t possible – if your fridge breaks, for example, that needs replacing as soon as possible – but whenever you can, invest in more long-lasting goods. Remember, just because something seems like a good deal now, it’s your future self who will have to put up with it if you’ve bought sub-standard products. Business magnate Warren Buffett once said: “Someone is sitting in the shade today because someone planted a tree a long time ago.”
One other area that’s difficult to cut back on is childcare and days out with the family. Keeping the kids entertained when you’re trying to save money can be tricky, but there are often cheaper or free alternatives to trips to museums, festivals, and theme parks.
If you’ve worked out your budget and find you have some ‘spare money’ left over, a good idea is to put it into a savings account to plan for the future. That way, if your financial situation changes at any point, you’ll have a safety net to help cover you until you get back on track.