How do you budget your finances?

Why you need a Personal Budget

The Golden Rule of Personal Finance

The golden rule of personal finance is to spend less than you earn. Spend less than you earn then invest the difference, take control of your money and secure your financial future.

If you don’t already have a budget then this is the first step you need to take today… get your budget in order and take control of your finances and your life.

What are the Key Benefits?

Control – budgeting allows you to be in control of your money rather than your money controlling you.

Confidence – you know where your money is coming from and where it is going, you have savings and emergency funds to cover any unexpected expenses and a plan to reach financial freedom.

Freedom – freedom from debt, stress, and worry cannot be underestimated, financial freedom is no longer just a pipe dream but a clear goal with a plan.

What is your Goal? Your why?

Why do you want to budget? Do you have a specific goal that you want to reach? Knowing and having a strong ‘why’ is a pre-requisite for a successful budget.

Your goal should be:

• Specific
• Important
• Achievable

Here are examples of some common goals for setting and sticking to a budget:

• Getting out of debt
• Saving to buy a house
• Saving for a family holiday
• Saving for Christmas
• Pay off loans
• To invest
• Financial freedom
• Retirement
• Gain control over finances
• Understand your cash flow

It’s important to set realistic expectations when setting your goals – some of these goals are short-term, such as saving for a family holiday, others, such as saving to buy a house, are much longer goals that won’t happen overnight. Other goals such as getting out of debt will be much more manageable if broken down into chunks e.g. pay off credit card, store card, loan etc.

Personal Assessment – where do you stand?

You now know the importance of setting a budget, the key benefits and you have a clear ‘why’, next you need to assess and understand your current finances.

Do you know your household’s cash flow? Do you understand it?

What money do you have coming in, how frequently, how variable in amount?

What outgoings do you have? What are the frequency and amounts, does this vary?

Block out a couple of hours to go through your finances, and make sure you have an accurate final list of all your income and outgoings. It’s a good idea to go through at least three months’ worth of bank statements to ensure you don’t miss any expenses.

When you are doing this exercise, also remember to include one-off costs such as car MOT fees, road tax, holidays, Christmas spending – and for expenses where you’re not sure of the exact figures, remember it’s better to overestimate and have cash left over than underestimate and be caught short.

Once you have gone through this exercise you will have a much clearer understanding of your personal finances and you will now be in the position to prioritise and control where your money is going and ensure you keep spending within your means.

Your Monthly Plan

At the beginning of each month, you’ll want to set your finances up for the month ahead. To ensure you are the one controlling your money, you’ll want to do this around the time you get paid if not before so that you are telling your money where it’s going rather than reacting to where it has gone.

You will already have all of your categories listed out from going through the personal assessment phase, so now it’s the matter of updating the figures for the month ahead and allocating your surplus cash into the appropriate savings accounts or against debt repayments – this will be dependent on what you have identified as your goal and ‘why’ for budgeting.

When building your monthly budget there will be some costs that you have limited or no control over, such as council tax, rent/mortgage etc, these are your fixed costs. Other costs such as food, entertainment, utilities, petrol/diesel are variable costs that you have much more control over – these are the easy win areas for reducing your costs and freeing up more cash to meet your goals each month.

Reviewing your Budget

The monthly budget process doesn’t just stop with setting the budget, you also need to track and monitor your spend against your monthly plan. It’s a good idea to review your budget at least weekly so that you know you are on track, and you have time to make any necessary adjustments.

When I first started budgeting I used to update my budget file every day, with online banking apps this is now incredibly quick and easy to do (a couple of minutes max). Any expenses that I had that weren’t on direct debit, I would pay for in cash which I would withdraw at the beginning of each month and keep in categories separate from each other. I found this method very easy to stick to and it made updating my budget file and reconciling with my bank a much easier process as there were far fewer transactions to deal with.

Reviewing is an important step in the budgeting process, you’ll want to quickly identify if you’ve underestimated any costs, and identify any overspending habits you may have developed over the years. Remember your ‘why’ when going through this process, and reaffirm your commitment to the process.

Keeping Momentum

Now you’ve mastered your monthly budget, you’ll start to see the results of your efforts and realise that your budget really is just the first step to achieving your financial goals.
Always keep your goals in mind, they will help you to remain disciplined and are what gives your budget meaning.

Do you have tips for building a personal budget that works? I’d love you to share them with me in the comments below or on my Facebook page.

Rebecca xx