In uncertain times, how do you budget like a pro?

When it comes to personal finance, one question that you’ll hear regularly is ‘How do I budget properly?’

A budget is a plan for where your hard-earned income will go towards. You’re basically creating a spending limit for each household expense. These can be categorised into essential and non-essential items. An essential example would be paying your rent, utility bills and food shopping. Non-essential examples include eating out regularly, buying expensive gadgets or gambling on sports.

Building good money habits can teach you better self-control and make you a more financially responsible individual. One idea many conscious consumers take advantage of is saving money on their utility bills through an energy price comparison site such as Utility Saving Expert. You may be surprised by how much you’re actually able to save. Better yet, these savings will increase your annual budget and help you save for the future.

Each individual will have their own personalised budget plan, based on their household income and what their monthly expenses are likely to be. 

Why do you want to budget in the first place?

Everyone will have their own personal reasons as to why they want to start budgeting. Some of the most popular examples include saving for a car or house, planning a dream vacation for the family or just putting money away for a retirement fund. Online data suggests that less than 50% of households in the UK follow some sort of budget. Those that monitor their finances closely are less likely to struggle financially. 

Defining why you want to budget to begin with can be a great motivator. After all, if you’ve got an incentivised goal to work towards, you’re more likely to stick to the plan. The road may be difficult at times and you are going to have to make sacrifices, but you will be rewarded for your patience in the long term.

Psychology plays a very important role in how we manage our resources. Experts believe that creating a budget means you’re far more likely to achieve your financial goals because you’re now motivated and emotionally invested.

Where do I start?

Before you begin, you’ll need to calculate what your current household income and expenditure is. 

If you’re employed, this will be straightforward. if you’re self-employed, you will have to estimate this, figures from previous financial years could help you here. Don’t forget to include other sources of income, perhaps you receive rental income, a pension, benefits or even dividends from stocks you hold.

Calculating your monthly expenditure will take a little more work. A good place to start is by finding copies of your credit card and bank account statements. When adding up these expenses, it’s a good idea to go back as far as 12 months. This will help you ensure you don’t miss one off irregular payments such as dental costs, or insurance policies paid for in one lump sum. If you pay for things via cash, it’s a good idea to keep the receipts.

Here’s a useful list of irregular expenses that you may have:

• Birthdays
• Christmas, or any other religious holidays
• Annual insurance premiums
• Taxes through self-employed work
• Holidays
• Dentists, opticians, vet fees
• Car related expenses such as road tax, MOT and servicing

Using a spreadsheet can help tremendously when calculating all of the above. This is because you can freely input the numbers and adjust them at any moment in time. It will also leave little room for error.

Once you’re happy that all the information is accurate, you’ll then need to figure out where your money is actually going. Start by highlighting things that are non-essential, such as eating out or buying cinema tickets and see if you’re able to reduce these or cut them out entirely. Some banks will even categorially break down your expenses for you.

How much do you want to save?

You’ll now need to decide how much you want to save and for what length of time. This will be based on what financial goal you chose earlier. For example, if you want to save for a family holiday that costs £4,000 and you’re able to save £200 per month. It will take you one year and eight months to achieve this.

Many financial experts also recommend that you put money aside each month to build up an emergency fund. This will help you when you need it most. Times where this will be useful include being made redundant from work or if your car experiences a major breakdown and is not covered through your insurance policy. The larger the emergency fund, the better. Covering up to six months’ worth of expenses will be enough for most people. This will give you plenty of time to get back on your feet should the unavoidable happen.

Finally, remember to review your monthly budget throughout the year to see how things are progressing. This will help you to see if you’re on track or if you need to make any small alterations to the plan. 

Now that you’ve been given the knowledge you need on how to budget correctly. It’s time to get started and take that first step towards achieving your financial goals.