Budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan can help in a variety of circumstances, such as saving for a big purchase like a house or a holiday. It could also help you work your way out of debt or prevent you finding yourself in debt during a difficult time.
5 Steps to budgeting
Determine your income
Start with how much money you receive after tax each month.
Next, break up your monthly outgoings into specific pots. You should include mortgage/rent and household bills along with any minimum payments on loans or credit cards. Also include what you typically spend on food, transport and any dependents. You may also have pots for luxuries such as holidays and leisure.
Calculate the difference
If your expenses are already higher than your income, you need to look at ways to reduce your outgoings. Nonessential pots such as holidays should be the first to be reduced. The Money Saving Expert’s “Money Mantra” later in this article might help with this. Once you have decided how to manage this, or if your expenses are already lower than your income move to step 4.
Determine what to do with your savings
If you have any money left over from your expenditures, you can decide where to put it. Firstly consider if you have any debt that requires paying off. It is important that you should always pay off debt before putting money into saving accounts (other than student loan). If you have no outstanding debts, you might like to save your money using an ISA or saving account.
Make it a habit
Ensure that you regularly review your budget to ensure it’s working for you and try to make a habit of sticking within your budget.
For more on with this you can use the Money Advice Service free budget planner: https://www.moneyadviceservice.org.uk/en/tools/budget-planner
Money saving expert’s “Money Mantra”
One good rule to live by is the Money Mantra. Before making a large purchase, you should always ask yourself the following questions. The mantra can also be useful if your outgoings exceed your income, as you can use it to review each outgoing.
- Free and impartial money advice – https://www.moneyadviceservice.org.uk/en
- Citizens Advice Money and Budgeting – https://www.citizensadvice.org.uk/debt-and-money/budgeting/
- Free online debt support – https://www.stepchange.org/
- National Debtline support – https://www.nationaldebtline.org/