Three little words that can change your life completely: On. A. Budget.
They’re enough to strike fear into the heart, dread into the soul, and a person into the nearest pub. Sticking to a budget is easier in theory than practice. But, it does get easier with time.
At MoneyPlus, we understand the challenges of managing your finances, especially when you’re dealing with significant debt – and/or are actively using a professional debt management solution – and are just trying to stay on a budget.
So, whether you’re new to budgeting or looking to refine your skills, this guide is designed to help to explain exactly what budgets are for and why they can be so important. It will also provide a selection of top tips that will help you stay on track and take back control of your finances.
What is a budget?
First things first. In order to create a realistic budget and stick to it, it’s first important to understand exactly what one is. In its simplest form, a budget is just a financial plan that outlines your expected income and outgoings over a specific period. This is usually a month, but can be done in shorter or longer-term periods.
When done well, a budget should help you best allocate your financial resources efficiently, making sure that you don’t overspend and do have enough money to cover your essential monthly payments. Ideally, it should also help you set aside funds for savings and/or more disposable spending.
Why is budgeting important?
From individuals who only have themselves to look after to small families running households, businesses of all sizes to national governments – budgeting is essential. But why? Well, put simply, because budgets provide a clear picture of a certain financial situation. From an individual’s point of view, they help you to:
- Control spending and keep you out of unnecessary debt
- Save for future goals, such as buying a house or going on holiday
- Prepare for unexpected expenses by building an emergency fund
- Reduce financial stress by knowing exactly where your money is going.
How to budget
Creating a budget might seem daunting, but it’s quite straightforward once you understand the basic steps:
1. Know your income
First things first. Before doing anything else, you need to determine your total monthly income. This number should include your salary, as well as any money you earn from freelance work or side hustles, and any other sources of income. Having a clear understanding of your earnings is the foundation of a successful budget.
2. Know your outgoings
Once you have an idea of your income, it’s time to look at your expenses. This list of outgoings should include all fixed costs like rent or mortgage, council tax and utilities costs. It should also try to list all variable expenses, such as the cost of food, entertainment, and dining out. While these costs can vary month-on-month, try to be thorough as possible. This will help create a more accurate budget.
3. Know the difference
Finally, all you need to do is subtract your total monthly outgoings from your total monthly income to find your ‘disposable income’. In other words, the amount of money you have left after covering all your essential costs. It goes without saying that you need to have a positive balance to maintain financial stability. If the difference is negative, this means you don’t have enough money to cover all of your expenses and will need to either sufficiently cut down on your non-essential spending or get help in the form of credit. However, this leads to debt, which can spiral out of control quickly if not managed responsibly.
MoneyPlus’ top budgeting tips
Once you’ve set up your basic budget, the challenge then becomes sticking to it. To help keep you motivated and stay on track, check out our top tips below:
- Set a goal: What do you want to achieve? Clear a credit card. Buy a car. Pay for a wedding. Have a nice holiday. You’re more likely to reach it if you define it.
- Give yourself a weekly allowance: Sounds sad doesn’t it? But how you spend it is entirely up to you. Splurge, stretch or even save it. The choice is yours.
- Take only cash out with you: Temptation is so much easier to turn down if you can’t bang it on a credit card.
- Any bad habits? Biting your nails doesn’t count. But if you go cold turkey on the takeaways or cool it with the cappuccinos, you’ll be amazed how much you can save.
- Keep all receipts for a week: Then review them. Your spending habits might surprise you – especially the realisation of how much money slips through your mitts.
- Push the boat out now and again: We’re talking dinghy, not super-yacht. But having a treat now and again is more likely to reduce the need for a frustration-fuelled spending spree.
- Put money aside where possible: If you can afford to factor it in, regard saving as a ‘bill’ and put aside a set amount each month. It will provide a safety net for the unforeseeable, such as your car breaking down or the boiler going on the blink.
- Be a ‘yellow sticker’ stalwart! Get familiar with the fridge in your local supermarket where all the reduced items go. First thing in the morning or last thing at night are the best times to have a rummage. You can get things marked down from £4 to 20p. You’ll just need to be prepared to eat it that day.
- Know when it’s time to ask for help: Having outgoings all over the place can be overwhelming. Whether you speak to a family member, trusted friend or a free-from-judgement professional (sometimes easier), talking your finances through with someone can be all that’s needed to help see the wood for the trees.
- Don’t beat yourself up if you go over budget once in a while (pain relief is expensive): Life’s unpredictable and stuff happens you can’t plan or prepare for.
Whatever the next steps on your journey, you can feel good about the fact you’re taking control of your hard-earned money and making it work for you.
