If you’re trying to save money, the very first step you should take is creating a budget. Budgeting can help you achieve your long and short term financial goals. There are 4 key steps in creating and managing a budget: choosing a tracking method, choosing a budget type, assessing your money and establishing where you can cut costs and redistribute funds.
Once you’ve put your budget into action, you can review your spending and gain an accurate understanding of your finances. After a few months, you could be surprised to see how much money is wasted on unnecessary things. You can then make any necessary changes to your spending habits and reap the rewards!
How will you track your budget?
Choose a means of keeping track of your budget. This could be a spreadsheet, an app on your phone, budgeting software or simply a notebook. Try to choose something that is accessible to both you and your partner if the budget is a joint effort. If this is the case, a shared spreadsheet or an app with a shared log in could be worth looking into.
What type of budget will you use?
You might not be aware that there are different methods that can be used for budgeting. What works for you will depend on factors such as your income (Fixed? Salary? Weekly wage? Variable?) and how good (or bad) your maths skills are. Some common budget types include zero-based budgeting, 50-30-20 budgeting, the cash aka ‘envelope’ budget, and the variable income budget.
Once you figure out which one is right for you, you can get started with your first trial month of budgeting.
How will you assess your money?
Budgets usually take some tweaking before they’re accurate so it could be a good idea to consider your first month a trial run. To begin the process, you must assess your spending. Take note of your weekly and monthly expenses (you can do this by analysing bank statements including other accounts such as Revolut). If you use cash frequently, hold onto your receipts. You will use this assessment to predict your incomings and outgoings for the month ahead.
Once you have a full list of your incomings and outgoings, divide your expenses into fixed or variable expenses.
Fixed expenses are necessary expenses that must be paid. Fixed expenses tend to remain the same month-on-month. Examples of fixed expenses include rent or mortgage payments, insurance, utilities, medical costs, car costs and taxes.
Variable expenses on the other hand can change amount and frequency. This kind of expense might include childcare costs, internet, clothing, gym costs, food and other household costs. When you create your budget, break these expenses down into categories. These categories can include things like food and drink, household, utilities, taxes, savings, pets, car, insurance, medical and so on.
Here is an example of expenses broken down into categories. Note that fixed and variable expenses have been marked with an (f) or (v):
Mortgage payments (f)
Household repairs (v)
Property tax (f)
Household maintenance (v)
Maintenance and repairs (v)
Road tax (f)
Car insurance (f)
Health insurance (f)
Mortgage protection (f)
Car insurance (f)
Home insurance (f)
Life insurance (f)
|Education||Health & Medical||Leisure & Entertainment|
Tuition fees (f)
School trips (v)
School supplies (v)
GP visit (v)
Monthly prescriptions (f)
Bi-weekly cinema trip (v)
Xbox Live subscription (v)
Sports events (v)
This will help you get a clear idea of how much you spend and what you’re spending it on. You can then figure out where there’s wiggle room and find what money is left over to use on savings and other important things.
Where can you cut costs?
Now that you’re in control of your money, you can identify where you can cut costs and redirect your money into important things like your family’s future. You might notice that by not making and sticking to a shopping list, you’re overspending by £50 per month on unnecessary food items. Or, by skipping breakfast and stopping to get your morning coffee and a pastry before work, you’re spending almost £140 per month instead of using the coffee machine at work.
You see, budgeting gives you greater awareness of your spending habits. And when you’re budgeting and you reduce your monthly outgoings, you could use the money for something more beneficial. How about starting a savings pot for a family holiday or a new car, or what about renovating your bathroom? You could even use it to put some financial protection in place with a life insurance policy. The point is, budgeting can free up some of your money which can then be put to better use for you and your loved ones.