According to the latest statistics from the Money Advice Service, over 1 in 5 of us experience anxiety related to finances. This may be because we’re struggling to make ends meet, while we deal with mounting debt, or simply plan for the future.
Regardless of whether or not you fall into this category, creating a budget is fundamental in ensuring your financial stability and helping you to reach your goals. It gives you a clearer picture of your finances and provides you with a roadmap for your spending and saving. And these two actions can be directly linked to a) enjoying our lives and b) looking forward to our next chapters, so although it can seem arduous, remember the motivations behind setting yourself a budget.
If you’re looking at restoring the health of your bank balance, read on for our guide on how to budget effectively.
Determine why you need to budget
Before getting into the nuts and bolts of your budget, it’s important to consider why you want or need one one in the first place. Doing so will not only help you to put your financial situation in perspective, but will also inform the specifics of your money-planning later on. Here are some of the most common reasons for making a budget:
- To reduce debt
- To cut down on unnecessary costs
- To save for a mortgage deposit or other large expense
- To provide a greater level of financial stability
Calculate regular outgoings
Once you know the general reason for creating a budget, it’s time to get yourself a clearer picture of your finances, starting with your expenses. If you have multiple bank accounts, consolidate all of the information in one place and categorise your regular expenses. This includes items such as:
- Rent or mortgage repayments
- Utility bills (electricity, gas, water, internet)
- Groceries
- Transport
- Insurance
- Subscriptions (streaming services, gym etc.)
We’d recommend using a spreadsheet to record this data. At the end, you should have a breakdown of your regular monthly expenses.
Estimate irregular outgoings
Not all expenses are regular or expected. Some costs come out of the blue (repairs and emergencies, for instance), whilst others are irregular, but foreseeable. To give you the most accurate impression possible of your finances, it’s good practice to put a figure to these irregular expenses. If you’ve got a wedding planned or know that your car is due a VAT, for instance, estimate the costs involved and include them alongside (but separate to) your regular costs.
Calculate income
If you’re a salaried employee, this is incredibly easy. Just take a look at your last pay-check to confirm your net pay (this is your gross pay minus any tax deductions, pension contributions, or student finance payments). For freelancers, it’s slightly more complicated. If your monthly income varies significantly from month to month, we’d recommend calculating an average figure to use in your budget. Total your net income over the previous six months and divide to calculate your monthly average.
Set an objective
Now that you have a clear idea of your financial situation, it’s time to set a specific objective. This will not only help to motivate you, but will allow you to track your progress over time. Hint: knowing what you’re saving towards does make it less hard saying no to certain things. A solid objective should have three qualities:
- Quantifiable
- Time-bound
- Realistic
Examples
- To save £20,000 over the next 36 months for a house deposit, putting aside £555 a month.
- To meet 10% interest charges on a £20,000 loan within 6 months, to avoid compound interest costs.
- To pay off the capital on a £15,000 loan within 2 years, at £625 a month.
Regardless of your income, your target must be achievable. If it seems unattainable, try and cut down on your expenses. Explore ways of reducing your regular costs, such as switching energy providers, cancelling subscriptions, or even remortgaging. And make sure you have a clear picture of your priorities in terms of what you’re prepared to ‘scrimp’ on and what you need to keep in your outgoings in order to be content.
Keep track
Creating a budget is just the beginning – actually sticking to it is the hard part. And to help you do this, you must keep track of your spending habits. There are a number of ways you can do this. One option is to go over your spending at the end of month, separate transactions into categories, and record everything in a simple spreadsheet. Another, perhaps easier way, is to use one of the many saving apps now available. Acting as digital debit cards, they track your spending habits in real time and automatically categorise them for you; they even provide you with easy-to-read monthly reports which show you if you’re on track to hit your targets.
If you’re looking to get your finances in order, get in contact with IMC Financial Services. Based in South West London, our expert advisors are on-hand to guide you through remortgaging, investments, or pensions. With our help, you’ll be able secure a more stable financial future.