The importance of managing your budget

Why should I budget?

This should be common sense but for those who need it spelling out if you’re going to spend more money each month than you earn then you’re going to get into debt pretty quickly. This will lead to trouble paying bills, your mortgage or rent, not having enough money to live on and when you find yourself in that position it can easily progress to losing your home or being evicted. A budget plan can help you avoid getting into any unnecessary debt.

Another sensible reason to budget is so that you can save up for the things you’re likely to need in future or the extra items you’d like out of life. Holidays don’t grown on trees, nor does a new car, and neither does the money to pay for an emergency repair to the old one!

A decent budget will allow you to plan your finances over the term of each year allowing for any unforeseen expenditure and to cover the more expensive months in your diary. It should also help you plan to have something left over for a rainy day.

A sensible budget can also help you improve your credit rating that could help with future loans or mortgages. A good credit rating could be the difference between borrowing on a low interest rate or a high one.

How should I budget?

Setting up a budget plan is fairly simple. All you have to do is measure your income against your outgoings and make sure that you aren’t spending more than you’re earning. Making a plan with set goals will help you stick to it more efficiently — so plan it, print it out and check it regularly to make sure you’re on the right track.

You can do it the old school way with a written ledger or you can access one of the many budgeting software packages or apps available for your computer, phone or tablet. If you’ve got the ability to choose an app or computer package then give it a go; many of them will have built in tools to keep you in control that will show you month to month what you can afford to spend and in some circumstances if you’re about to go over your spending limit.

What do I need?

To start your budget plan you’ll need to gather all information from the past year that will give you solid details on what you actually spend. If you’ve got access to your bank statements then that’s great, they will show all of your direct debits and standing order payments that happen every month, anything you buy on a regular basis such as petrol and groceries, items that you pay for on your debit card and if you regularly use a credit card then get the statements for that too.

Income

You need to account for all the money that’s coming into your household. Add up all wages, pensions, child support, family credit, investments or interest payments that happen each month — this is your total income.

Outgoings

Start with your largest regular payments and work your way down. Go through your bank statement and list your mortgage or rent, council tax, utility bills, insurance policies, groceries, transport and motor costs, debt and loan payments, internet, television subscriptions, mobile phone contracts, social or physical activity memberships (think gym, golf club, dance classes, keep fit, etc.) — when you’ve got all of these together this will give you the first part of your outgoings.

The next step is for you to look at the less regular payments for the activities you spend regularly on, for example; eating out, going to the cinema, day-trips, a night at the pub, money you spend on cigarettes, clothing, entertainment, and once you’ve got a clear idea of how these measure up from month-to-month you can make a more considered estimation of the average monthly spend to add to your regular outgoings.

When you’ve got your total then you can compare how much money is coming in compared to how much is going out. If you’ve got money left over then well done! If not, you’re going to have to see where you can either cut back on what you spend or increase what you earn.

Your budget is in credit

Great news! Now you can add extra items to your budget such as a saving scheme for a holiday or a new car and you can use the figures you’ve arrived at to sensibly dictate what you can afford without making life too hard on yourself.

If your budget will allow it and you can afford to it’s a great idea to try and carry out any of the following:

Start an emergency fund. If you can put a little away each week to accrue a more significant amount you can use this for any unforeseen emergency situations and surprise payments. If you’ve managed to build up some kind of slush fund it won’t affect your monthly budget too hard if you are caught short and you can continue to manage your finances without any real imposition.

Pay off existing debts and credit cards. If you can manage this then not only will your outgoings drop but also you’ll be saving additional money by not paying the interest or fees associated with the debt or loan amount. It’s a win-win if you can — so do.

Invest your savings. You might not earn much with the current interest rates but if you can use any savings you have to make a little extra money then you should consider it. There are a selection of current accounts that offer better rates of interest currently than of saving accounts or ISAs so look around and see which work for you.

Your budget is in debt

If you’re spending more than you’re earning you need to turn that around immediately and get back in the black.

Look at ways you can cut back — can you get cheaper insurance policies? Are there alternate utility suppliers who offer better rates? Are there additional ways to cut down on groceries, luxury items and entertainment until you get yourself back into a more financially healthy position? If you’re drawing cash regularly then start a spending diary to see where it’s going; if it’s not a necessity then can you forego those purchases to make savings there too?

If you’re really overwhelmed by the state of your budget and it looks impossible to pay for everything on your current income there are places you can go for expert advice. Talk to Citizen’s Advice or look for a debt advisor; they can suggest ways to get your debt under control that you may not have considered. They are experts after all, so try not to let your debt spiral so far out of control there doesn’t seem a clear way out — talk to an expert, it’s what they’re there for.

James Jones

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