Taking control of your finances can seem a little daunting, but it’s a lot easier than you think.
Putting aside the time to take a good look at your finances can go a long way, especially if you’re in a sticky situation with things such as paying back debt. We’ve put together a handy guide for creating an effective budget if you’ve got no idea where to begin.
The best way to start taking control of your finances is by creating a monthly budget. Many people don’t use budgets because it simply doesn’t work for them, or that’s what they want to believe. The real reason why people don’t use budgets is due to the fact they struggle to stick to it, which is understandable. Sticking to a budget is easier said than done, reason being why people end up ignoring them altogether.
However, this is the worst mistake you can make! A budget is your bread and butter if you want to successfully manage your money. If you’re willing to make the effort, your hard work will truly pay off.
FIRSTLY, WHY IS A BUDGET IMPORTANT?
To put simply, a budget is a plan which helps you to keep track of your finances. You can determine whether you have enough money to build an emergency fund, put a deposit down on a new home, or simply save money for a birthday gift.
If you don’t have enough money, you can create an effective budget to find out where your money is going and where you can make cut backs. It will also keep you out of debt, or help you climb out of the debt hole if you currently owe money.
HOW TO GET STARTED
There are lots of ways to create a budget.
If you’re a bit old fashioned, you can create your budget simply using a pen and paper. If you’re known for making mistakes, you might want to consider using Excel. Your calculations will be worked out automatically. If mistakes are made, you can easily fix them with just a few clicks of a button, saving you the dread of having to start again.
If you don’t know how to lay out your budget, there are templates online which you can download for free.
STEP 1: Calculate your income
The first thing to do when starting off your budget is working out your monthly income. This step is very important, as this is what you’ll deduct your expenses from. Plus, if you don’t know your income, how are you supposed to know what you can afford?
If you have one job, you only need to note down the money you take home from your salary. However, if you have more than one job whether it’s a part time job or walking someone’s dog, you need to include it.
Calculating your income should look something like this:
Income-
- Main job: £2,500
- Part-time job: £400
- Online surveys: £100
STEP 2: Add up expenses
You’re expenses are split into two categories: fixed and variable.
Your fixed expenses are bills you need to pay i.e. your mortgage or rent payments, gas and electric, utilities, car payments and any debt you currently have. Knowing how much of your income these expenses take up will allow you to see what you have left to spend on your other expenses which takes us to…
Your variable expenses, which include your groceries, Wi-Fi broadband, cable, gym membership and so on. Let’s not forget the little luxuries we treat ourselves to on a daily basis for example your morning coffee at Starbucks. Try to make these figures as precise as possible.
The layout should be the same as before:
Monthly Expenses-
- Rent: £500
- Debt: ££££
- Electricity bills: £100
- WiFi Broadband: £20
- Gym Membership: £40
STEP 3: Deduct expenses from income
As the step suggests, take your expenses and deduct them from your monthly income.
If the final figure is positive, then give yourself a pat on the back. This means you have money left over after you’ve paid all your bills. The extra money you have can be put towards an emergency fund. If you’re currently paying back any debt, you can put the extra money towards clearing it.
However, if the final figure is negative, some changes need to be made. The first change you need to be make is the most obvious, which moves us on to our next step…
STEP 4: Reduce the cost of expenses
If you have more expenses than you do income, you need to make some adjustments. You can do this by making cut backs, for example:
- Stop buying morning coffees and make them at home – you can save hundreds by the end of the year
- Pack a lunch – worker can spend between £5-£7 a day on their lunch, which is costing you over £1,000 a year
- Walk or cycle to work
- Switch your gas and electricity.
STEP 5: Set goals
This step can be really beneficial, as it gives you something to work your money towards. Sit back and think: “What do I want to achieve?”
Do you want to be financially secure? Debt free? Build a fund? Perhaps open a business?
Think about where you are right now, where you want to be in the next few years – depending on your choice of goal – and use your budget to help you work towards it. This will get you into a habit of saving money and keeping your finances under control.
It works miracles!
WHAT ARE THE BENEFITS?
- Gives you control over your finances
- You know where your money is going
- Can help you keep track of your spending
- Keeps you focused on your goals
- Prepares you for unforeseen costs
- Helps tackle debt
- Allows room for saving
Creating an effective budget can be tough to start off with, but if you stick to it, it’ll be worth it!
