A spending budget is a plan to monitor your finances each month so that you have a clear idea of where your money is going each month. This may be done with an end goal in mind such as clearing debt, or saving for a house. Alternatively it may be a necessity in that your monthly expenditures are too high, and you're currently struggling to make ends meet.
Do I really need one?
Of course there's no obligation, but everyone can benefit from taking charge of their finances in this way. Not only will it help those in financial difficulty, it will also help those who aren't make the most of their earnings as opposed to wasting money on too many luxuries.
It's also important to review your budget regularly, particularly if your financial situation changes. Simply put, by making sure that the budget realistically dictates your daily spending, you're more likely to be able to stick to it.
It shouldn't take more than an hour or so once all you have the relevant information to hand. Gather as much information from paperwork as you can. This might include
- Previous months bank statements
- Credit card/Store Card bills
- Household bills (gas, electric, broadband, TV, mobile phone et al.)
- Debits for insurance policies (car, house, travel etc)
- Details of savings or pension contributions
Calculate your income
The obvious place to start is calculating your income. For this you'll need to tally up your earnings (if they vary, you should take an average of several months wages), along with any other sources of income you have, such as benefits or other allowances. If you have other sources of income which aren't monthly (maybe a regular bonus for example), be sure to factor this in, working out roughly how much extra it provides when divided over a monthly basis.
There is personal finance software available to help with this, but a spreadsheet is a free method and just as effective. If you don't have a spreadsheet software available to you, you can download a free software such as 'Open Office', or register free for a Google documents account. Also a quick search on Google for 'free home budget template', will throw up a wealth of free spreadsheets which will speed things up for you.
Calculate Your Spending
Once you've calculated and entered your incomings, it's time to calculate your spending. Simply add up anything you currently need to pay in bills, rent, repayments etc. to get your golden figure. You should use your bank statements to make sure you don't miss anything, remembering to factor in a 'monthly' calculated cost for any non-monthly expenses, which are also due at some point in the year. You should also use your bank statements to calculate an average monthly spend on groceries, but keep this figure separate for now, as you may be able to scale it down if your budget reveals an overspend, or if you feel you're spending too much and want to save additional money.
With all of your incoming and outgoings detailed on your spreadsheet, you're now in a position to analyse the data. The first thing to consider is the total of each; are you currently overspending each month, or are you spending within your finances? That will determine how much you need to budget, and the next step is to scrutinise each spend individually. You may be surprised as to how much you've spent, for example on food, and that meal planning each week in advance could save you a lot of money. Alternatively you may be alarmed to find out how much your morning coffee costs you each month, thus opting to take your own each morning in a travel cup! The amount you want to save will depend upon your need and desire to do so, but once you've made a list of things to cross off or reduce from your expenditures, you're in a position to start drawing up your budget.
Drawing up the budget
Regardless of your situation, your goals will need to be realistic in order for you to be able to keep to the spending plan. Some expenses are clearly difficult or even impossible to eradicate, but small changes to your lifestyle are more likely to award the most benefits. For example, eating less takeaways, dining out less, and walking as opposed to driving or getting public transport, are easy changes to make and can result in you saving hundreds each month. Also budget planning meals in advance will help you waste left food, making your grocery budget stretch further.
Drawing up your budget also provides a chance to scrutinise outgoings for regular bills such as gas, electric, and phone. It's a good idea to periodically compare your supplier against other providers, as competition in the marketplace can often lead you to save hundreds each year simply by changing your supplier. For more information on managing your budget and saving money please see our guides How to Manage Your Budget Successfully and Tips For Improving Your Domestic Finances