Budgeting

Budgeting is one of those practices we should all be doing, but whether or not we do is a different question. It falls under the same category as regular exercise, fresh air and looking both ways when crossing the road. However, instead of being for your physical health, budgeting is all about your financial health. 

When it comes to budgeting there’s no one magic answer, with there being many different systems. What works best for you is all about you. But, simply put, every month you should be putting some money aside for the future.

What’s the point of Budgeting?

Budgeting is important as it ensures that you will have enough money for the things you need. Whether this means at the time of budgeting or in the future, it could allow greater financial freedom in the long run. Budgeting also means you will be less likely to get into debt, or could offer a route out of debt.

The First Step

The first step when you are trying to start budgeting is to figure out how much money you spend each month. These expenses can be separated into three different categories. These are essential, non-essential and savings. 

Essential

These are costs such as food, rent, bills, running a car and more. The proportion of your money that you need to spend on these expenses obviously depends on your situation. For example, if you’re living at home, you’re much less likely to be paying rent or buying your own food. Essential costs that may be overlooked are various bills you may be paying, such as Wifi or TV licence.

Non-essential

Non-essential costs are luxuries that may not be necessary. Examples of these costs could be eating out at restaurants, monthly streaming services, gym subscriptions, or new clothing. It can be hard to work out how much you may spend on these costs each month. This makes it all the more important to figure out your essential costs and then budget from there. 

Savings

A main point of budgeting is to save some of your money for the future. This could be to save up for a deposit, a new car, a holiday, or having a bank account ready for those unexpected expenses. However, this portion of your money could be used to pay back loans you have taken out, or to go to your pension fund.

The Second Step

Once you have figured out how much you need to spend every month, you can immediately take that away from your monthly income. Bear in mind that this income needs to be post tax income. This income could be in the form of wages, pocket money or investments. 

There are many different budgeting systems that have been suggested, but ultimately it is down to personal preference. The normal suggestion however is that 20% of your income should be squirrelled away as the savings part of your costs. This leaves you with 80% for both essential and non-essential costs.

However, if you have high essential costs which take up a much larger portion of your income, saving may not be possible. In this case, budgeting is still useful. This is because it will show you exactly what you’re spending your money on, and then you can figure out if all of your essential costs really are essential. 

The Third Step

When you have figured how much you spend every month compared to how much you earn, you can set realistic goals for you to reach. For example, you can set a goal to save £1,000 in your first year of budgeting, or perhaps pay off a certain proportion of your debt. Setting these goals can help you keep focus through the year, and then can help you work towards your long term goals, such as buying your first house. 

A great way to save without missing the money as much is to set up a direct debit. This way, as soon as the money hits your account, the amount you want to save is put into a separate account. This way, you never have direct access to this money, and it is then much easier to save.

Once you have your total income and total costs, you can figure out how much you have left over at the end of each month.

Creating a spreadsheet like this is a good idea. It can show you where your money is going, and how much you can afford to save.

Ultimately, budgeting is all down to you. No one can tell you how or when to budget, and you have to figure out which system is best for you. But, when you do decide to budget, you should find that reaching your long term goals suddenly feel much more achievable.