You would think by now we should know how to budget.
But to many it seems like too much effort to bother. And the longer you leave it the more difficult it is to make a start.
However, if money worries are preventing you from following your dreams, then getting into a monthly routine of checking your personal finances can be well worth the effort.
By getting a good understanding of your personal finances you will be able to prioritise how you spend your hard-earned money.
This means that you may have enough for that dream after all.
What is a Budget
A personal finance budget is nothing more than a means for you to take control of your cash.
On a basic level, a budget is a tool that helps you calculate how much money you have left each month. It should also help you define how much you want to spend on things.
But the fun part (and yes I did use the word ‘fun’) is getting to understand the detail of WHAT you spend your money on. This then enables you to better assess if you are spending your money wisely.
With a bit of knowledge, you can factor in spending on the fun stuff.
How you create your budget will depend on what tool you feel most comfortable using.
You could use a simple notebook and pen, or a printable that has all the sections detailed. You then use a calculator to work out the end result.
This can be a bit laborious and open to error, so an easier and quicker solution is to use a spreadsheet.
The spreadsheet will take your inputs for income and outgoings. It will then automatically calculate how much you have left. You may even get a pretty chart as a result.
Our Personal Budget Planner helps guides you with what to input. It then works out what your potential savings could be each month. It also shows you in a chart how you spend your money.
Whether you are in debt or in credit it is essential to know where your money is being spent each month.
Creating a personal budget does not mean you always have to cut back. In fact, understanding how you currently spend your money might be enlightening.
We all know that eating out, whether it’s just a coffee every morning, or a sandwich at lunchtime, really do add up.
But there is no need to feel guilty about these ‘treats.
By comparing the amount you spend on different areas can help you strike a balance between doing the stuff you love and making sure you can pay your mortgage.
Having an understanding of how you spend your money gives you back control.
It means you can make an informed judgment on what to prioritise your spending on.
How to Budget
To avoid over-stretching yourself use some simple techniques with your budget. They may also mean you have a little bit more left each month than you were expecting.
- When you input your income, always use your take-home amount. This is the net amount after all your taxes have been removed. Round your income down to the nearest increment of 25, i.e. £2019 will become £2000, £1566 will become £1550 and so on. Not only does this make the maths easier but it gives you a bit of a buffer to allow for some slight variations that occur on a monthly basis.
- When inputting your outgoings do the opposite. Round up to increments of 25, i.e. £81 becomes £100, £130 becomes £150 and so on.
Subtracting the rounded up outgoings from your rounded down income gives you the total amount available to save each month.
This technique gives you a realistic value for the total amount available to save. It allows for minor monthly variation without too much worry.
Which means if you stick to your budget you should comfortably not overspend and be able to start saving.
Break it down to make it useful
By allocating categories to your purchases you can advance your budgeting techniques a step further.
Categorising your spending means you can easily see where your money is going. This means you can tell what proportion of your monthly income you spend on specific types of items.
It may come as a surprise to find out how much you spend on entertainment and eating out compared to food and utilities.
By knowing how much you spend in each category you can assess if there is any way to alter your spending. Perhaps you could even set an amount that you don’t want to exceed for each category each month.
This is true financial budgeting and is not for the faint-hearted as you need to keep a close eye on what you spend as you are spending it.
But the rewards could be impressive.
If you want to make a start on budgeting try our free budget calculator to see what savings you could make.
What to do if you have no money left
What should you do if the rounding technique above leaves you with a negative total amount available to save?
A first step could be to reduce the amount you are rounding by. This reduces the buffer amount but may still keep you in the positive.
If you still spend more than you earn then you really need to look at how to reduce your outgoings.
Categorising your spending will help you see where your money is going. It may then be obvious where you should cut back so you can manage things a bit better.
If you still can’t see any way forward, my advice would be to get advice from a professional. A good resource for saving money, or paying off debt is MoneySavingsExpert.
Show me the money
Using the rounding technique above you will notice there is a gap between your actual value and the rounded value. Totting up these differences can show you the potential extra savings you could make each month.
For example, if your income is £2199 and you rounded down to £2175 you instantly have a saving gap of £24. If you then take all the rounded up values in the outgoings and you may get a total gap of £76. Then the total extra cash you actually have spare each month is £100.
Let’s call this your secret stash!
If you put this amount into a separate secret stash savings pot it gives you an annual saving total of £1200.
This extra saving is without even making any extra effort, as long as you stick to your budget!
Just think of what you could do with that money!
Do you think it is worth looking at what you are spending to see if you can re-prioritise to help follow your dreams?
If you want to make a start on your own personal finance budget, take a look at our free budget calculator and see what savings you could make. We give a recommended budget and you can compare your spending to see how you are doing.