Budgeting is just as important for households as it is for businesses, yet many households fail to get a grasp on their income and expenditure. If that resonates with you, here’s a step-by-step guide to establishing a budget, which will bring you another step closer to financial wellbeing.
Why do I need to budget?
Tracking your monthly income and expenses will undoubtedly make managing your money easier. If you don’t have a handle on the money that flows in and out of your household each month, how can you make concrete financial plans for the short or long term?
Budgeting brings numerous benefits. It will help you:
· Stop overspending
· Avoid getting into debt
· Make informed and conscious decisions about your spending habits
· Set realistic and achievable financial goals
· Track progress toward your financial goals
· Work out how much you can afford to save towards your long-term goals
· Reduce finance-related stress
· Be prepared for unexpected events
A household budget is a powerful tool that promotes financial responsibility. Every household should have one and creating one is an essential step towards achieving financial wellbeing.
How do I budget?
Although many people feel overwhelmed when faced with the task of documenting their income and expenditure, budgeting really doesn’t need to be difficult.
There are numerous free tools available online to help with the task. For example, Microsoft has numerous household budget templates to suit many different situations, or if you’re more of a Google fan, their version is here. [LS1]
These templates are customisable so you can adapt them to your situation.
Sit down with your bank statements and go through them line by line to highlight what you earned and what you spent over the course of the last few months then add it into the relevant category on your spreadsheet.
Typical sources of income include wages and salaries, commissions and bonuses, tips, self-employment income, pensions, state benefits, share dividends, interest on bank deposits, buy-to-let rental income, gifts, child support and alimony, scholarships and grants. Make sure you have all your income sources documented.
Expenditure will vary from one household to the next. Your outgoings will include rent or mortgage, utilities, debt payments, insurance, subscriptions and discretionary costs which include groceries and dining out, transportation, personal care, entertainment, pet care, gifts, household supplies and so on.
If expenditure in a category varies from month to month, it’s always best to use a worst-case scenario. Anything in excess of what you are expecting can be used to boost savings!
Set your spending limit
Some of your costs will be fixed but others are variable, such as how much you spent on dining out, personal care and entertainment.
Often budgeting can reveal surprises about where your money is going and cause you to reflect on whether you are overspending in certain areas. The aim is to be free up enough money from your budget to prioritise saving [LS2] towards your long-term goals such as retirement, education fees for your children or buying a home.
How can I make budgeting easier?
Having separate bank accounts can really help. Dividing money into different accounts keeps savings out of temptation’s way and makes it easier to stick to your budget.
We suggest:
· an account for bills and expenses with direct debit payments set up wherever possible
· an account for spending money
· a higher interest savings account for your emergency fund and savings
· investing in cash alternatives once you have saved enough to do so
Automating transfers between the different accounts as soon as you are paid makes it easier to manage your funds and keep to your saving plan.
If you’re not already budgeting and saving, why not make it a priority this month to take control of your finances in order to secure your financial future?
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