Have you just received your first pay-check and suddenly you’re asking yourself what should you do with this? Should you buy a new TV, go on holiday, or should you leave it in that bank account you’ve had since forever? Well… I’ve been in this situation before and that kickstarted my journey into understanding how to become more sensible with your money and I wanted to share some ideas.
In this blog post, we’ll discuss three main points:
- The Importance of a Budget
- How-to create one
- Useful Resources
Having a budget allows you to easily answer two questions — are you spending more than you are earning (this is either your monthly salary, etc). And do you have enough left within your budget to warrant buying something, what would be left if you did?
A well-organised budget will give you the financial security and a peace of mind knowing where you’re receiving and spending your money. At a quick glance, you will be able to see how much you’re spending and where, could I cut down on some of my outgoings? (wow, I spent £100 on food this month, that seems a lot, can I cut this down?)
Most importantly, you’re less likely to end up in debt. It’s so important to understand the value of money and being sensible with what you can spend as entering debt can be a downward spiral that only gets worse.
Budgeting will improve your credit rating/score — this is a whole blog post in itself, but this works in conjunction with the previous point.
No debt = a better credit score = more opportunities in future life
A solid budget will provide you with the foundations to achieve your goals. As mentioned, a well-organised budget allows you to cut down on some outgoings, helping you save for whatever it may be? A new house? Summer holiday?
As Jim Rohn puts it:
‘If your Outgoings are more than your Income, your Upkeep will be your Downfall’
So, how do you start budgeting?
I personally find budgeting to be incredibly beneficial and a good budget shows you what you have coming in and what you can expect to be leaving your bank account. Mostly, people have a monthly budget, but you can make a weekly or even daily budget! So, how do you create one?
Step 1 — Calculate Income
To create a budget, you’ll first need to understand your income. I would first recommend gathering all your past bank statements and receipts (if you still have them). Your bank statement will show EVERY incoming and outgoing payment you made in that month. Once you have all your incomings (salaries/passive incomes/benefits, etc), we’ll look at outgoings. This could be from your weekly/fortnight/monthly salaries depending on how you’re paid. Here’s an example.
- Take home pay (after tax) from job: £1,800
- Tutor lessons: £60
- Blog income £50
Monthly income total = £1,910
Step 2 — List All Expenses
Write down a list of all the expenses you expect to have during a month. This list could include:
- Mortgage payments or rent
- Car payments
- Personal care
- Eating out
- Transportation costs
- Student loans
Use your bank statements, receipts, and credit card statements from the last six months to identify all your spending.
Step 3 — Determine Your Fixed and Variables
Fixed expenses are those mandatory expenses that you pay the same amount for each time.
Include items like mortgage or rent payments, car payments, set-fee internet service, trash pickup, and regular childcare. If you pay a standard credit card payment, include that amount and any other essential spending that tends to stay the same from month to month.
If you plan to save a fixed amount or pay off a certain amount of debt each month, also include savings and debt repayment as fixed expenses.
Variable expenses are the type that will change from month to month, such as:
- Eating out
Start assigning a spending value to each category, beginning with your fixed expenses. Then, estimate how much you’ll need to spend per month on variable expenses.
If you’re not sure how much you spend in each category, review your last two or three months of credit card or bank transactions to make a rough estimate.
How to Use Your Budget
After you have set up your budget, you must monitor and continue to track your expenses in each category, ideally every day of the month. The same budgeting spreadsheet or app used to make your budget can also be used to record your expense and income totals.
Recording what you spend throughout the month will keep you from overspending and help you identify unnecessary expenses or problematic spending patterns. Take a few minutes each day to record your expenses, rather than putting it off until the end of the month.
Once you have reached your spending limit in a category, you will either need to stop that type of spending for the month or move money from another category to cover additional expenses. Also, once you have your monthly income, use this simple hack to save even more!
Your goal in using your budget should be to keep your expenses equal to or lower than your income for the month.