Budgeting… A word I have never liked the sound of. 2020 was a very expensive year for my partner and I; we brought our first house together. Thousands of pounds flew out of our bank accounts; money for the deposit, house buying fees, renovations and furniture. Although we now own a house it’s still weird not seeing that money in our bank accounts. Since our monthly expenses had gone up we were finding it hard to re-build our pots of money. As 2021 approached we started looking into finances and wow there was so much to learn. One word that kept cropping up was ‘budgeting’. We made sure that come 1st January 2021 we were ready to start saving up again. And I can confirm budgeting works. Here’s how you can budget your money too:
What is budgeting?
Budgeting is a financial plan involving both your income and expenditures. In other words it compares how much money you make versus how much money you spend.
When should I start budgeting?
Budgeting is a good habit for anyone; at any age or stage of life. Budgeting is particularly relevant to anyone who earns money. Your source of money may vary: salary from a job, side hustles, passive income (investments, dividends, property) or student finance. If you’re interested in finding out how you’re spending your money or want to use your money for other reasons (e.g. saving) then creating a budget is a good place to start.
Why should I budget?
- Better understanding of your finances: There’s no harm in keeping a close eye on your money. Budgeting is a great tool in understanding your finances. You get to see exactly how much you earn and where you then spend it.
- Over-spending: Maybe each month you’re dipping into your overdraft or savings, putting one more thing onto your credit card. I definitely fell into this trap and this was the driving force behind me starting to budget. I’d had enough of feeling stressed figuring out what I could/couldn’t afford. Seeing your income and expenditures will show you whether you’re living within your means. If you’re over-spending there are two options; increase your income or reduce your spending.
- Long-term goals: Maybe you’ve got your eye on a new car, maybe you’re dreaming of buying a house or wanting to retire early. These are all longer-term goals, which (unfortunately) require money. Set out your budget, include all the necessities (food, petrol, rent) but try incorporating some savings so that you’re always working on achieving those longer-term goals. I’ll talk about how to incorporate savings below.
How do you start budgeting?
Budgeting is actually really simple. First off decide how you want to document your budget. It’s as easy as grabbing a pen and some paper! Matt and I set up a spreadsheet on excel to monitor our budget. There are lots of resources online, if you don’t fancy setting up your own spreadsheet there are free templates available. Regardless of how you document your budget here are the 3 steps to follow:
- Calculate your income: You want to total everything that is paid into your bank account. It’s easiest to do this for a set period of time, for example monthly. Include any salary earned after tax (if this fluctuates monthly then average the previous 3 months as an estimate), investments (shares, dividends, property rentals), loans (student finance) or any benefits.
- Calculate your expenses: There are five main areas individuals spend money; housing (mortgage/rent), bills (water, gas, electricity, TV, WiFi, tax, insurance), food, transport (petrol, insurance, public transport) and personal (holidays, clothes, work-related insurances/registrations). Start by looking at your bank account; include your direct debits and review your bank statements making sure you include anything you frequently spend money on.
- Calculate the difference: So once you’ve calculated your income subtract you’re expenses. If you’re left with a positive number then that’s great! You’ve got money left over; either treat yourself or you can choose to move that money into your savings. If you’re left with a negative number then don’t panic. You just need to re-assess. Either look into ways on increasing your income or reduce your expenses.
What to do with your savings?
There’s no doubt about it, saving is hard. So if you are able to start building up a pot of savings then that amazing! Firstly, if you have any debt then it might be a good idea to pay that off before you start saving.
So how do you build savings into your budget? It’s a good idea to allocate a percentage of your income towards your savings. The 50 30 20 rule is well known and can be found on banking websites like HSBC. 50% goes towards your needs (housing, bills, food, transport), 30% towards your wants (clothes, nights out, etc) and 20% towards your savings. You can alter this rule to suit your income. After graduating I could afford 5-10% towards savings; once my salary increased I could then afford 40% towards savings. I always make sure to move the money into my savings as soon as I’m paid (prevents the temptation to spend it).
Remember it is important to enjoy yourself so don’t become obsessed with saving. Make sure you can afford all your bills and that you spend your money on things you love doing. Keep investing in yourself!
Finally..
My last piece of advice is to make budgeting a habit. Try to review your budget at least once a month. You’ll quickly learn about your spending habits and go on to reach your financial goals! Good luck!