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If you want to pay off debt and/or start saving and get your finances in order, you NEED to know how to draw up a budget.
The only way to know what you’re spending and what you’ve got left at the end – if anything – is by listing everything.
Creating a budget: where do you start?
Take your last three months’ bank statements, and list ALL of your outgoings (Include ALL of your personal bank accounts).
One place so many of us fall down when it comes to budgeting is by only including bills, food and fuel.
Things such as monthly subscriptions, online purchases, trips to the shop, nights out etc are often unaccounted for, and so get missed when it comes to budgeting. Take a look at 13 Reasons Why we Overspend for some examples.
It’s a typical scenario. Unless you include everything, you’ll have spent all of your money before you know it. There’s nothing left in the pot to buy a birthday present for your mum. As a result, the credit card comes out. You think nothing of it, telling yourself you’ll pay it off next month. Only, because you blow your budget month-after-month, it never gets paid off. You add something else to your credit card, and the cycle continues.
This is called overspending.
Are you overspending?
Once you’ve listed all of your outgoings, add them together and divide by 3 to get your average monthly spend.
If your outgoings are higher than your income, you have a problem that needs solving. First of all, you’re going to have to work out where you can cut back, and look at other ways to save money.
Secondly, if you want to get out of debt or begin saving, you need to boost your income and look at some quick ways to make some extra money.
Is your income higher than your outgoings?
If so, that’s great news! But you still need to make your money work smarter. It’s still possible to save money on your outgoings and increase your disposable income, which you can then look to save or invest. Spending more than you need to is fine if you don’t want to grow your net worth, but if you do, then release as much of your hard-earned cash as you can and pay it back to YOU. It is totally possible to enjoy your life without throwing money away by making smart choices on where your money goes.
What do I need to complete my budget?
What you’ll need:
- A spreadsheet
- Bank statements (last three months for ALL accounts)
- A calculator
- A few hours of your time
Making a budget is one of those jobs that we all put off, simply because it doesn’t offer instant gratification. The thing is, any progress in life can only be achieved through work and perseverance, and getting out of debt and becoming financially independent will take time and commitment from YOU. Time invested in yourself and your future is the first investment you need to make, now.
How does Miss Penny Money budget?
We worked out what hubby’s base salary was for each month (not including any overtime), and cut back on all of our fixed monthly outgoings where we could, including cancelling non-essential subscriptions like Netflix. There are so many shows available On Demand (BBC iPlayer, ITV Player, 4OD, Demand 5), it’s possible to enjoy television without a subscription service.
Food and fuel goes into a separate bank account.
I allocate a set amount of our income for clothes, birthdays, pets (insurance, food, toys). Also hair, car maintenance, holidays and other regular expenses.
One thing I find really helpful is to use cash envelopes. At the beginning of each month/week, I’ll draw out the set amount for each category and put them in an envelope, only using that envelope to pay for (budgeted for) items. This helps me keep physical track of my spending and stops us from overspending. It also means that you won’t overspend, because you can physically see exactly what your budget is for each category. If you know only have £75 a week to spend on food, you’ll be more conscious of the spending choices you’re making. See 10 Ways to Save on your Supermarket Shop for some grocery money-saving tips.
If you need help on how to list your income and expenditure, take a look at this example:
Everyone’s budget is personal to them; for example you might want to include a ‘personal grooming’ budget, or add a category for extra-curricular activities, such as school clubs. The important thing is to make sure you list everything, so that nothing gets missed. Additionally, if you need to cut back, you might need to scrap some unnecessary items. If you’re trying to get out of debt, as Dave Ramsey says ‘cut out everything except the basics’!
Making your budget – and sticking to it
Once you’ve got your list, it’s one you can stick to. Think of it as your financial blueprint.
Remember though, that it’s not set in stone and will need to be monitored and tweaked on a regular basis. For example; I originally allocated £10 a month to birthdays, but it wasn’t enough as some months there were more birthdays than others, so I increased it to £20 and cut back on other areas.
Some people check their budgets weekly; some monthly. Check your bank account at least daily to begin with to ensure there aren’t any outgoings you’ve missed. Once you’ve taken control of your money, you will hopefully find you have money left over. This can either be put towards paying off debt, or transferred to a savings account.
One thing I like to do each month is see how low I can get my weekly food shop, and then if there’s any money left over in the budget, I put it towards my latest debt repayment.
Once you know how to draw up a budget, you’ll find it much easier to stay on track with your spending. If you’d like to use the above example as a template for your own budget, you can download the spreadsheet here. It’s fully customisable, you can edit the descriptions and add or remove rows to suit your own circumstances. I’ve left the descriptions in there to help you in case you’ve missed something.
Alternatively, if you prefer to use a handwritten template for budgeting, you can download these free printables when you subscribe.