How to Create and Live with an Effective Budget
Whoever said “Money can’t buy you happiness” probably never got to the last week of the month to find that there’s nothing in the pantry and no money left in the bank!
This might sound like a no-brainer however many people struggle with staying within their income limit and that is where debt is created. Debt can have a snowball effect as any of you who deal with it will agree. Creating a budget, whether you have debt to deal with, are trying to avoid debt by living within your means or are trying to reduce outgoings to free up cash to put into savings is well worth doing.
What is a Budget?
Simply put a budget is a tool that will help you keep on top of your spending, and will ensure that you have enough money for what you need. By collecting all of your income and expenditure data together to ensure you have a clear idea of what you have coming in and out, and allocating portions of income for different things, i.e. groceries, petrol, bills etc you will be able to create an effective budget to live by.
It is essential that your budget is realistic as “I won’t spend anything” is very hard to maintain and besides, life can be very miserable without any money whatever!
Income and Expenditure
The first thing you need to do when it comes to putting together an effective budget is to put aside a couple of hours of really quiet time. Now get a notepad and pencil and collect together all of your bills, check your internet banking for all of your income, regular outgoings….. everything. No payment is too insignificant. A small amount for washing machine cover might seem insignificant but when you add it to that other small amount for Netflix, and that other small amount for a charity subscription you soon find you might have a chunk coming out of your bank in dribs and drabs that you really didn’t take much notice of, with each of the payments being so small. Things soon add up though!
Don’t forget to add any other payments that pop up over the course of the year such as a six-monthly subscription charge or annual payments such as insurance. These may be split into monthly amounts and put aside as part of your budget so that when the bill is due you have the cash ready.
Now put together all sources of income, from work, maintenance, benefits, interest; everything. Total up both your income and expenditure amounts so far and write these down.
Now you need to look at everything else you spend. We aren’t talking about the easy to see petrol charges or the utility bills; we are talking about the coffee you treat yourself to on the way into work, the magazines you buy for the kids on a Friday, the quick treat in a bakery and so on. These tiny expenses can actually take up a significant amount of money over the course of a month and can do so without you really noticing.
Whether you use your bank statements to track all of these spends or do a real time spending diary (writing down everything you spend, as you spend it), make sure you are completely honest with yourself. Ensure you include any cash withdrawals and note down what they were spent on.
Cut the Excess
If you’ve followed the steps above, you will have a pretty good idea of what you have coming in and going out. At this stage you need to see where you can make immediate savings, particularly if your outgoings and higher than your income.
Do you need Sky TV (Cable), Netlix, Amazon Prime TV and Now TV? Really? We’re pretty sure that with some prioritising you could make some significant savings there. Are you certain you need that magazine subscription when you still have three previous editions wrapped and unread on the sideboard? What about all of those “little” spends you identified when you did your tracking? If you bought a Thermos flask you could save a fortune on takeout coffee and save time waiting in line. If you cut back the magazine buying to once a month and used the library (for free!) instead you’d save money and your little ones certainly won’t miss out with a library full of fun books to choose from.
Go back to your online banking again and check for direct debits and standing orders going out that are no longer needed. Now call your phone company, utilities and everyone else you pay a bill to and see if they can offer a better deal. Some people hope to avoid switching providers in order to reduce hassle however if it will save you a large chunk of money it could be worth it. That said you can usually save a significant amount with a spot of haggling.
You’d got rid of the money drains and now have a budget, don’t you? Not quite! Now you need to remember that life is not all about paying bills and eating. Have you put a monthly or weekly amount per week down to go towards Christmas or birthdays? What about clothing, footwear, school trips that pop up, hobbies and entertainment and car maintenance? It is important to have all of these built into your budget in order to live well (if frugally!) and to help you stick to your budget. When you are on a strict budget it can be hard not to fall back into over-spending, using credit and forgetting to monitor your expenses. Make sure your budget is realistic.
Saving are important! You need to ensure that an amount is put aside each month for savings. Some people tend to have two savings pots, emergency savings (the washing machine broke down, unaccepted car bill etc) and nest egg savings that you really don’t want to dip into. You may only be able to put a very small amount into your savings but a small amount is better than no amount.
Do I Have a Budget Now?
Pretty much! If all of your listed outgoings (we mean everything, including groceries, childcare, the Xmas fund, debt payments and so on) are covered by your income, brilliant. If not, you need to work out what is going wrong. Either you don’t have enough coming in or you have too much going out. If you can’t trim your outgoings anymore because you are on a frugal budget as it is you need to look at any debt payments you might have. While essentially they are classed as a bill, there are other ways to address the problem that is debt. Speak to a specialist debt advisor or look at what benefits and savings you might be eligible for that you should be claiming.
Making it Work
Once you have a budget in place you need to manage it and how you do it is up to you. There are loads of moneysaving apps and gurus who will help you stay on track (for a fee) however we suggest sticking with some old fashioned methods.
- Check your Budget Regularly – Make sure you know what is going out of your bank and when, when you need to make a cash payment and how much you have to spend on certain items / occasions.
- Envelope Budgeting – If you know you have a certain amount to spend on groceries this week or month why not draw it out and put it in an envelope? Take cash from the envelope when you go shopping and put the change back in, noting on the envelope what you spent and where. This gives you a much sharper focus on how much you actually have to spend and discourages splurging. Work to the motto “when it’s gone, it’s gone” and remind yourself that you can’t put more grocery / spends money back in the envelopes until the agreed upon day. Spending up on Tuesday when you have to wait until Friday does not mean you can pinch money from the car maintenance envelope to top it up as you won’t necessarily be able to put it back.
- Digital Envelope Budgeting – Rather than physically drawing out cash, why not set up multiple bank accounts (within the same bank) to use for certain sections of your budget. One of our keen budget-fans here at ParentsNeeds HQ for example has a main account (all income comes in here and all payments go out of here), one for groceries (funds are transferred in weekly), one for putting aside bill money (she’s paid weekly and bills go out monthly so she puts a set amount a week away) and one for spends. Longer term “pots” such as car maintenance, savings and what not are elsewhere so they can’t be easily raided!
Keeping track of your budget and splitting up your spending pots this way enables you to see exactly what you have at a glance and encourages good spending habits. It also helps you to identify exactly where you are overspending. If you have any money left over in your envelopes or bank account “pots” when they due to be refilled put half into savings and use the other half for a treat.
Once you have a budget in place and know you have x amount to play with before a certain date you tend to get quite savvy when it comes to shopping, making do and stretching your funds! It can actually be quite a fun challenge to save money when the worry of not having enough has been alleviated by having assessed your finances and after putting a plan of action into play. With the extra incentive of being able to save more and have a treat at the end of the month if you’ve come in under-budget spurring you on we’re sure that you’ll soon be frugality-masters!
After setting up a budget you need to reassess it completely after the first month. Decide whether your grocery budget was far too optimistic and so needs to be raised or if you’ve found you actually have money left over in one section and so could add it to another, or put it into savings. You won’t know if a budget works unless you live it and there is no shame in tweaking it. After checking the first month and then the second month (in depth) there’s no reason why you can’t then leave it three month or eventually six before you review it fully, assuming no changes have occurred. Life happens and costs go up so keeping an eye on your budget to make sure it still works for you is essential.
Money doesn’t make the world go around however not managing your finances effectively and having a hard time affording everything can be pretty stressful. Thankfully there are many agencies out there who are qualified and able to help you get back on track, deal with debt and to make sure that you are claiming everything you are entitled do (if you didn’t need it, you wouldn’t be offered it!). Do get in touch with them if you feel you need additional help.
For those of you already thinking about what spends you could reduce and trying to remember where you put your last utility bill, good luck! Having a budget that works can be more liberating that you’d think!
If you have any top budget tips, don’t hesitate to leave a comment below.