It is all too easy for us to end up spending more than we earn each month and when trying to save it can be hard to balance the books. Money management is not really something a lot of us are good at. In this article we aim to help as we take a look at how to set a budget and manage money more effectively.
How to tell if you need to budget
There are a few signs which indicate the need to start budgeting properly:
- Credit cards are always at their limit
- You struggle to pay bills
- Money is a worry for you in general
- You borrow money from family or friends regularly
- You need to take out short term “pay day” loans
- You are always overdrawn
If any or all of these are applicable you might need to budget a bit better. This article is intended to aid those needing to manage money more effectively, if you have serious money concerns it is important that you seek some help and support. The Citizens Advice have a great list of actions, help and support.
Income
Any budget starts with your income. Basically, that is the amount you have to spend every month as a maximum. If you want to save, then the amount of money you want to save needs to be deducted from this amount. When looking at your income overall, look at your basic pay, any overtime or bonuses can be added back in later, but unless they are guaranteed, never take them into account for your basic budgeting process.
Outgoings
Once you know your income, you need to balance it with your outgoings. When budgeting, split your outgoings out into two categories: Essential and discretionary. The essential spends are the ones that you absolutely have to do and cover things like: Rent, utility bills, council tax, credit card or loan payments, food, car maintenance, phones, Wifi and fuel. Discretionary spend is for things like holidays, socialising, TV packages, memberships, clothes and any other non-essential purchases. You need to focus on the essential items.
Download a couple of months of bank statements and, line by line, total up the spend and categorise the spend into discretionary and essential. When doing this, don’t forget to add in foreseeable one-off payments that you might not yet have spent such as the car’s MOT or basic car maintenance such as tyre and brake replacements. Also factor in things like birthday and Christmas presents. These one-offs can be difficult to account for, but we would recommend one of two methods: work out roughly what you are likely to spend on them over the course of the year and divide that by 12 to get an average monthly cost or work out what month the spend will happen in and allocate the costs specifically to that month. The latter way is better if you aren’t good at saving. The former works if you take that amount and put it aside in a savings account, for example, ready for when you do need it.
Balancing
You now have your income and your outgoings split out by essential and discretionary spend. Quite simply if your outgoings are more than your income, you are spending too much. The place to start looking is that discretionary spend column as these are the items that you can ultimately live without, but you should also look at how you can reduce your essential outgoings. Here are some tips:
- Cancel any subscriptions or memberships that you don’t absolutely need or don’t use
- Reduce your TV packages or phone package to the bare basics. Do you really need 700 TV stations and every sports channel? Do you need unlimited premium data on your phone?
- Transfer credit card balances to zero percent cards
- Shop at the cheaper supermarkets or buy own brands
- Look at switch utility/insurance/broadband/bank providers to get better prices
- Change your mortgage to a lower interest version
- Reassess your clothing spend, do you really need another pair of jeans, trainers, shoes etc?
- Cut down on drinking or smoking if you do either
- Socialise at home rather than in the pub or a restaurant
- Get a flat mate or move in with friends or family to reduce accommodation spend.
- If it makes sense, consolidate your debts to one larger debt, but at a lower interest rate.
Once you have looked at all your outgoings and you need to be ruthless here, re-do your budget with your new expected spend. If you have done things right, you should now be earning more than you spend every month. The important thing is to stick with the outgoings you have newly budgeted for rather than spend the difference.
If you are struggling financially, as so many are right now, you can talk to your bank who will help you carry out a financial health review and help you with your budgeting or you can contact Money Helper (which used to be called the Money Advice Service) who will also be able to assist you. Independent advice and support is also available via Citizens Advice.
