The importance of budgeting

Knowing how to budget your finances can make a significant difference to your disposable income

Budgeting is the easiest way to know exactly where you stand each month. As the saying goes ‘Forewarned is forearmed’, and a monthly budget helps you to keep on top of your finances, making adjustments easier throughout the month if required.

Just because you create a budget, doesn’t mean you have to scrimp and save. It just means you’re aware of all your outgoings and incomings throughout the month. This allows you to identify any potential problems beforehand and ensure your finances remain affordable.

How to budget your finances

The best way to approach this will be different for everyone. Some people will want to create a spreadsheet that’s easy to adjust, while others will be more comfortable with a pad and pen. Either way, this is a list of all the commitments you must meet throughout the month. Include your mortgage or rent, utility bills, phone bills, car payments, life insurance etc. Once you have completed this list, you’ll have a total amount of all your necessary outgoings for the month.

You can also estimate some ongoing variable costs, such as the amount you spend each week on the weekly shop or fuel for your car. Don’t just think about utility bills, also consider any payments you make into a savings account, pension, or investments. This is also a good exercise when you want to reduce your outgoings, as it becomes easier to see if there are any expenses you can do without.

Now you have a total figure of your monthly expenditure; you need to work out how much money you receive each month. You can use old payslips or a bank statement to see how much you receive. If the amount varies due to overtime or bonuses, then take an average. If you use payslips, make sure you use the pay you receive after all stoppages.

Don’t forget to include any other sources of income, such as family allowance or any benefits you receive.

Comparing these two lists will quickly allow you to see how much spare income you have each month (presuming your income is higher than your expenses). If you have a monthly deficit, you can see if there are any outgoings you can cut. If you have more income, then you can decide what to do with the additional money. Any extra money is known as your residual income. You could save some of it or allow yourself a monthly budget for entertainment and eating out, or if you’re lucky enough, both.

Motivating yourself to save can be different for everyone. Some find it easier to concentrate on a long-term goal, such as a holiday or car, while others are more efficient savers if they have short-term goals, such as a shopping trip.

If some of your necessary expenses are looking a little high, consider ways you could reduce them. Switching energy providers can save you money each month, as can moving a credit card balance to a new company.

If you have enough to build an entertainment budget into your expenses, don’t see your residual income as a challenge. You don’t have to spend it all. Any money left over can be carried forward to make next month easier or added to a savings account.

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