How to construct a monthly budget
Everyone should have a budget. If you’re in debt it will help you get out of it. And if you’re not in debt it will make your money go further and allow you to reach financial independence that bit quicker.
The problem these days is that people have so many outgoings, direct debits, loan agreements and the rest, that they often don’t really know how much they are spending each month.
In fact, many people are not even aware that they are spending more than they earn each month … until it’s too late.
Be aware … constructing a budget ISN’T quick. It could take you the best part of a day. But that’s half the point, as it will make you REALLY focus on your spending.
First, you need a good budget planner. While you can buy software such as Microsoft Money or Personal Accountz, we wouldn’t bother. In fact there’s your first saving.
If you’re using a Windows PC then you have the Excel spreadsheet on your computer, which is all you need. We’re going to itemise all your spending and Excel offers you the greatest flexibility.
Alternatively, go to moneysavingexpert.com and search for ‘budget planning’. There’s a very good spreadsheet planner there, which you can import into Excel. It DOES have 90 or so categories.
Once you’ve pulled it into Excel you can delete some, or add others as you need.
Strike a balance here. You don’t want a separate category for chewing gum or biscuits … but you ALSO don’t want a huge entry saying ‘sundries’.
The problem most of us have is that we don’t KNOW where a huge part of our monthly spend goes. Categorising your spending is a very good discipline.
You are going to need to get ALL your expenditure together here. Three months bank and credit card statements should allow you to see what your average spend on petrol, insurance, cash withdrawals, food, right down to daily lunches.
You may find that ‘CASH’ comprises a large part of your spend. The more you can switch to debit or credit cards the better … as you will then have itemised spending on your bank and credit card statements.
Watch out for exceptional spending. Take your statements from March, April and May and you’re going to be missing out the big spends on Christmas and Summer holidays. You can either average these over the year or add them to your expenses as ‘one offs’.
Another thing to beware of is double counting. You may have got £100 out of the bank and spent it on the week’s groceries. Don’t log the £100 under both ‘cash’ AND ‘food’ or you’ll be counting that £100 twice. Again, this is where putting purchases on plastic can help you budget.
Also, ensure you aren’t counting your credit card or loan repayments as well as the meal, car or sofa they went to finance, as again you’ll be double counting.
The other side of the column is how much you earn of course. Again, not quite as simple as it sounds. We want NET income here – so that’s after tax and national insurance. Do you earn any interest from investments? Have you included Child Benefit, any gifts or annuities you receive?
Once you’re confident you’ve got EVERYTHING in that budget you do the simple but deadly sum.
In the immortal words of Mr Micawber. “Annual income £20 pounds, annual expenditure £19, 19 and sixpence, result happiness. Annual income £20, annual expenditure £20 and sixpence, result misery.”
Of course our finances are a bit more complex than they were in Charles Dickens’s day. But the good news is that serious belt tightening isn’t necessary just yet.
Just LOOKING at your figures should suggest areas that you can painlessly cut away.
Do you really need Sky for TV you never watch, or a gym subscription that you never use? Can you take a packed lunch everyday instead of nipping out to the deli?
You may discover direct debits that are still paying out each month for insurance you had forgotten you had.
There will hardly be an area where you can’t save. Switch your gas, electricity, phone and internet to a cheaper provider.
Look for a cheaper mobile phone tariff. Shift to a interest free credit card, or a cheaper mortgage or loan deal.
And if you’re paying interest on your credit card each month but still saving money each month then it’s a FALSE economy as you’re CERTAINLY paying more interest on the card than you’re earning on the savings.
Dip into your savings and pay off the credit card debt. Most of us can make significant savings before we even look at cutting out the luxuries.
