These days when the word Budget is mentioned most people will think of a politician, grinning like a Cheshire cat whilst holding a red briefcase outside Downing Street. And let’s be honest – it is usually a mixed bag in terms of what comes out of the Budget, but always remember that the devil is in the detail (and not all the headline grabbing stuff is as good as it seems!).
I am not however writing about the Government’s budget but rather your own. And the devil here really is in the detail!
Managing your finances is crucial to helping you achieve your personal goals and objectives. A planned-out approach your budget will help you track your expenses, save money, and work towards your future. Whether you’re aiming to buy a house, travel the world, or simply build an emergency / rainy day fund, having a budget in place can make a significant difference.
So – what do we need remember when thinking about a budget?
Understanding Your Income and Expenses
Step 1: Calculate Your Income
Start by working out how much actually comes into the pot each month (after taxes). If you are a salaried employee, then you will need to look at your payslip. If you have other forms of income, such as rental income, investment income, savings income etc then you will need to consider if you will need to pay any tax on these at the end of the year.
Doing this will give you a clear picture of the money you have available for budgeting.
Step 2: Check your spending
The stock line here is to record all your expenditure; this should include your bills, groceries, travel costs, entertainment etc. The easiest way to do this is to look through bank & credit card statements and pull these figures out (as most people no longer really use cash). There is no point looking over a single month’s spending – that is too short of a timeframe. Look over at least 6 months, but preferably 12 months statements. This gives a true reflection of the shape of spending over the year and takes into account things like holidays, annual subscriptions (e.g. insurances) and ongoing maintenance costs.
Note – make sure to record cash withdrawals, as this is money that has been spent as well. You will need cash throughout the year so factoring this into your budget is important.
If you need somewhere to record these details then have a look at our Annual Budget Planner
Setting Goals and Objectives
Step 3: Define Your Goals
You may have some short term and some long-term goals in mind when thinking about your budget. Short term goals might be things like a family holiday, buying a new car or paying off a credit card.
Your long-term goals might include things like moving house, planning for when you stop working, weddings for kids etc.
The thing about goals is that unless they are planned out then they are just wishes. Makre sure you have SMART goals in mind –
- Specific – For example – going on the holiday of a lifetime
- Measurable – How much do you need to be able to do this?
- Achievable – Is the goal attainable and not impossible to achieve?
- Realistic – Is it within reach and relevant to your life / business / financial plan?
- Timebound – When do you want to achieve this goal?
For more about goal setting have a look at our blog – Be SMART at this time of the Year
Creating Your Budget
Step 4: Categorise & Prioritise
Your expenses can really be divided into 3 sections –
-
Essential / Living Costs
these are the things you need to spend for everyday living. This will include things like food, electricity, heating, clothes etc.
-
Lifestyle / Discretionary Costs
these are costs for the things you like to have. These will be things like eating out, coffees, nice shoes, regular holidays etc.
-
Luxury / Ad Hoc Costs
these are the bigger, one-off expenses every few years. These will be things like changing your car, a child’s wedding, a holiday of a lifetime etc.
Some of these costs will be slightly different each month, like electricity or food bills, but when you consider them over the course of a year then they average out.
Prioritising essential expenses (as noted above) is important because these are the things that you need to pay for each month or year to be able to live. The next step will be to plan out what you want to spend on lifestyle costs like eating out etc. If you want to achieve some of those short and long-term goals, then there will have to be some level of sacrifice along the way. Here is where budgeting really starts to take shape. Set a monthly limit each month as this will help avoid overspending.
Step 5: Pay yourself first
If you have worked on your SMART Goals then you will have as idea of what it will cost to help you achieve your goal. You will also have a realistic timeframe and so you can start the process of working towards that. You know what you will need each month to cover essential costs and you have set a limit for your lifestyle. You will now be able to set funds aside for your goals. The trick here is to pay money towards these goals at the start or end of the month – basically just after you get paid. Pay yourself first. Paying yourself first means that you are less likely to spend the money you need to help you achieve your goals!
Step 6: Review regularly
Regularly review your budget and track your spending to ensure you’re staying on track. If you notice that it is a bit tough towards the end of the month then it means you are being disciplined and that your plan is more likely to succeed. Remember to celebrate progress towards your goals as well.
Tips for Successful Budgeting
Emergency Fund:
You need to be ready for the unknown so having a readily accessible slush fund for emergencies is essential. Aim to save at least three to six months’ worth of living expenses in an easily accessible account to cover unexpected events.
Debt Management:
Focus on paying off high-interest debt like credit cards to reduce financial strain and save on interest payments. If you have a few of these then work on paying off the one with the highest interest as quickly as possible. Make sure to keep making at least the necessary minimum payments to the debt so that you don’t incur late / missed payment charges and impact your credit score. Once you pay off the first of these then add that monthly payment to the next highest interest debt and keep working at this until your high interest debt has gone. Also look at 0% balance transfer credit cards, if possible, to help reduce the amount you are paying in interest.
Conclusion
By following these steps and maintaining discipline, you’ll be well on your way to achieving your financial goals.
Remember, the journey to financial success begins with a well-planned budget.