If you are a regular to our site, you will no doubt have realised that we like to preach the importance of being frugal and budgeting finances at all times.
To us, it is very simple. If you can account for every penny and you spend within your means there should be no problem when it comes to monthly cash flow.
We do, however, appreciate that it isn’t always this straight forward for everyone, and that is why many of our money blogs aim to give realistic advice and tips to help people make the changes that they need to get back on track.
One question we are often asked, however is: “What exactly is a budget? Is it a spreadsheet, is it something that can be done in your head? We just don’t know where to start”.
It appears that many people struggle with the very concept of a budget and have no idea how to start one. We’re here to give a few tips which should (hopefully) show the ease at which a budget can be set up, and highlight the greatness it can offer when it comes to getting back in control of finances.
First and foremost, we must stress there is no right or wrong way to get a budget up and running. For instance, some people, especially those in the older generation, will budget using a ‘budget book’ which is basically a pen and paper method. They will literally write down their income and expenditure and do good old-fashioned maths to establish where their finances are at. For the younger generation, computers will do all the work. Many people set up spreadsheets as they are a god-send. Again, income and expenditure need punching into the computer and the computer’s spreadsheet will calculate and highlight how much money is left or due to go out etc. It is that simple. Using spreadsheets on the computer is a great way to keep tabs on multiple accounts with high transaction activity.
Basically, it is entirely up to you how you set up your budgeting recording system. There is no right or wrong answer and it is purely what you are comfortable with.
So, once you have your paper and pen or spreadsheet in front of you, the first thing you need to do is identify exactly how much income comes into your household on a monthly basis. Bear in mind, this figure should always resemble the figure you bring home after taxation.
Once this has been done, you then need to accurately determine outgoings. It is always better to overestimate on this one as ‘worst case scenarios’ do, and will, crop up. Contingencies should always be in place should something go wrong such as a washing machine breaking down or a car needing urgent repairs. Set some money aside in a ‘contingency pot’ and let this build up month on month so that you have plenty of money set aside for if any of the aforementioned scenarios occur.
You should prioritise certain areas of your expenditure too. So, for instance, there should always be enough in the ‘bill paying’ pot. In fact, you should over-budget in this area as you never want to fall short when it comes to paying bills.
Another thing that people fail to realise is that budgets can be altered. A lot of people assume that once a budget has been done for the month ahead, it is rigid and set in stone. That is the complete opposite of what a budget is all about. A budget has certain elements in it that should never change; things like income, direct debits for bills etc. On the other hand, there are things that vary from month to month. The amount that you can afford to spend on clothing and social occasions, for instance, is something that will fluctuate week in week out and is something that will need constant monitoring. That is where a budget comes into its own. You can make these amendments very easily and can see whether you can easily afford to make these changes, or if you are cutting it too close to the bone and have to back out of a certain night out. Budgets also highlight where you may have been over cautious and will show if there is any money that can be spared from one area of expenditure to cover another.
So long as you constantly manage, update and frequently refer to your budget, it will never let you down in terms of overspending and getting into debt.
A budget is also good at highlighting where there may be room for improvement when it comes to excessive spending. Because a budget shows things in black and white, you can clearly see from month to month where a lot of income is getting spent. Of course, this will tend to be through bill payments and other expenses that are part and parcel of everyday life, but if budgets continually show that quite a lot of money is going out and being spent on things like social occasions and you are feeling the pinch at the end of every month, it may be worthwhile reining in going out as often.
Budgeting is all important if you want to feel in complete control of your finances, and as we have proven, setting up a budget is so easy to do. It just requires discipline and good management.
Budgets are there to be amended and altered on a regular basis, so don’t fret if you constantly feel you are tweaking your money – that is exactly what you are supposed to do if you want to make the very best of your cash.