“Create a budget!” – that’s often the first piece of advice you’ll be given when you’re hoping to get a better grasp of your finances.
But, unless you know how to put together a good budget, that person might as well be telling you to play a piano concerto – easy if you know how, but if not, you’ll come unstuck pretty quickly.
A budget is important – and working without one can lead you into unforeseen financial difficulties with no hope of climbing back out. So, we’ll walk you through the 8 most important steps that’ll take you closer to understanding your household money.
Step 1. Gather your paperwork – and your thoughts
Guesswork is the number one enemy of the budgeter – you might think you’re accurate, but the chances are you’ll be missing odd details or underestimating costs.
So, instead of best-guessing, make sure you’re got the relevant paperwork or access to information close at hand.
These things are going to be vital:
- Bank statements or access to online account records
- Household bills
- Credit card statements
- Any other records of money that is spent or earned
Try to access this information for a period of around 3-4 months. If you don’t have the info to hand, take a bit of time to order old statements or check online accounts.
Step 2. Decide on a timescale
For most people, planning a budget over a month makes sense – but that’s only really because monthly payroll is the norm.
If you’re paid weekly, consider doing your budget to also span a week.
Step 3. Work out your incomings
The next step is to add up everything that comes into the house money-wise.
The important thing here is to look at your salary and other incomings after any deductions – this is normally easily done since they’re almost always worked out for you on your payslip.
Adding up your incoming salary is easy if it’s a fixed amount, however, if it’s not, it’s better to use an ‘average’ amount you bring in. To get the average, add up the amounts you’ve earned over your last 3 paydays and divide that number by 3.
Remember though, there might be other household incomings to add in. Make sure you account for:
- Partner’s income
- Allowances/benefit payments
- Additional income from second job(s)
Again, take an average where needed. When all these factors are added together you’ve got your monthly household income.
Step 4. What are your essential out-goings?
Now, everyone’s essential spending is going to be a little different – but the most important word here is ‘essential’ – meaning, these are the things you need to spend that are absolutely non-negotiable. An average household list will look something like this:
- Rent/mortgage payment
- Household insurance
- Utility bills
- Council tax
- Mobile phone bill(s)
- Credit card repayments
- Transport costs (could be public transport – or car and associated costs)
- Loan repayments
- Food shopping costs
You might not have all of these things – and you might have more, but remember, account for absolutely everything.
It’s going to pay to be as accurate as possible here – try not to guess at a gas bill for example – it’s very easy to under-estimate. Be certain that you’re ticking off payment amounts as you identify them on your statements.
Again, finding an average here is a good idea, especially when things like utility bills and mobile phone bills can change month to month – so, cover these costs for the last 3 months and divide them again by 3.
When you’ve got this figure, you know what your essential out-goings cost.
5. Calculate your disposable income
Now, quite simply – taking your essential out-goings figure from your household income figure is going to give you your disposable income.
Your monthly household income is £1800
Your essential monthly out-goings total £1000
Your disposable income is £800 each month
Now, this disposable figure you’ve come to might look great – but often a lot of this can be accounted for too.
6. Spending of disposable income
Unless you never leave the house other than to work, there’s going to be some spending of disposable income to add up. Think about the things you spend money on that aren’t ‘essential’:
- Hobbies/pass times
- Gym membership
- TV subscriptions
- Going out
- Clothes shopping
- Restaurants/takeaway spending
At this stage, try not to make any judgement about spending on these items – virtually everyone in the country spends on non-essential things, and trying to cut them out altogether isn’t realistic, it’s better to get an accurate picture of where you stand.
7. Keeping track of spending
You’ll now have an overview of what your financial picture looks like – incomings, outgoings – and other costs.
If you want to really get on top of your budget, you’re going to now want to keep track of everything you spend. There are a couple of ways of doing this – you might keep you receipts so you can tot up your spending manually – or even add the amounts to a personal budgeting app.
If you can, allocate a few minutes each day to making sure you add up your spending. It’s much easier to do it a little each day – rather than trying to backtrack and do it once a week or month.
8. Make adjustments moving forward
Now it’s time to consider your priorities!
Glancing over your records of spending might point out some obvious areas to work on changing. For example, if you can see that socialising costs you 50% of all your disposable income, but you’re hoping to save for a holiday next year or a clear a credit card bill – then maybe that’s an area that could be scaled back a little to help you toward your goal?
Keeping an accurate awareness of where your money is going is the only way to get on top and master your own finances.
Credit and debit cards take the ‘real life’ away from money – instead of it being coins in your hand, it’s just numbers on your banking app. If you can look at these numbers every day and make finances a part of your daily life – you’ll work out how you can live within your means.