Many people find themselves getting into financial difficulties simply because they have never sat down and spent a little time drawing up a budget. And, whilst many of us will know exactly or roughly how much money we have coming in each month, far fewer will be able to put an accurate figure on how much they spend over the same period and therein lies the problem.
However, by creating a budget plan, it will help you to make good use of your money and to avoid the pitfall of over extending yourself. In reality, it’s all about adopting a different mindset about money and spending and once that’s instilled in you, you should always be able to plan for the future without worrying about where the money’s coming from or about getting into debt.
How to Draw up a Budget
There are many budget calculators and other online tools to help you draw up a budget but you can create one simply by using a pen and some paper. Basically, you need to draw up two lists – one for your income and another for your expenditure. If it helps, you can decide whether your budget plan should be designed to cover a weekly, monthly or quarterly period, depending on how often you get paid (or receive other sources of income)and how frequent your bills are but, if you’re not sure, it’s probably better to draw one up on a monthly basis.
Firstly, write down all the money you have coming in each month. This could be derived from wages, benefits, pensions and, perhaps other sources of income such as rent you receive or money for lodging from grown up children. Then, once that’s complete, add it all up to come up with your total income each month.
Then, on a separate sheet of paper, write down all your expenditure. This should include the common things such as mortgage or rent, utility bills, insurance policies, loans or credit/store card repayments, food and essential household items etc. However, it’s the ‘etc’ that is key here. You need to also include other miscellaneous expenditure down to the minutest detail so things like your daily newspaper, money you spend down at the pub, money for clothes. Try to think of everything you spend money on and include them on the list. Then, what about things like dental or optician’s costs, any pet inoculations etc. Think of these miscellaneous items which may only occur once or twice a year and then, if you’re planning a monthly budget, divide these miscellaneous items by 12 to give you a monthly equivalent, then add that on to your expenditure total. And…don’t forget to include what you’d spend on birthdays, Christmas etc – remember, it’s all expenditure!
Once you are satisfied that you have included everything for both your income and expenditure lists, it’s time to take a deep breath and tally the amounts up on both. It’s deep breath time!
If you find that the total amount of money on the income sheet is greater than the expenditure total, you can breathe a huge sigh of relief as this means that you have sufficient money coming in to cover your bills and your lifestyle. Basically, you’re running a sound budget plan already. This may also prompt you to see whether or not you can use any of the surplus money to put away into a savings account which will help you to make even more of your money.
However, for many of us, this is rarely the case and we often find that the expenditure list total is far higher than our income. This is when tough action is called for.
You don’t need to be a rocket scientist to realise that if your expenditure outweighs your income, then if you don’t take action, you’ll eventually get into debt and have to face all of the problems that come with it so the sooner you take action, however painful, the better.
Earn More or Spend Less
Sounds simple doesn’t it? However, these are the only 2 options you have. If you truly feel that you cannot reduce your outgoings (although that’s usually because people don’t want to compromise on their lifestyle choices), then the only option is to earn more to increase your income until it overtakes the total on your expenditure sheet. It could mean working extra hours, taking on a second job, looking for a higher paid job etc.
However, for many of us, those options might not be realistic and if that’s the case, then you have to take the most painful option, which is to reduce your expenditure. Go through that list with a fine toothcomb and firstly, take a look at your essential expenditure – mortgage or rent payments, bills, council tax etc. These are the items that must take priority and, whilst they’re unavoidable, you may be able to reduce the total cost of some of them. Utility bills are a good example where you may be able to save a considerable sum by switching suppliers. Next in line are your other financial commitments – loans, credit cards, store cards, HP agreements. Whilst these need to be paid, they are not classed as ‘priority outgoings’ like the items above so you must always put them second in terms of importance. Now, consider these secondary items. There are hundreds of lenders out there all vying for business and you may find you can reduce the cost of your loans and credit cards by switching to another provider or even consolidating your debts. Once again, this provides you with an opportunity to lower the expenditure column.
However, one of the best ways to balance the budget is to look at all of the items on your miscellaneous list. The odd couple of pints down the pub, that ‘treat’ from the Chinese restaurant you enjoy each weekend, that CD you just had to have. Basically, all of the things you enjoy. Add up all of these and then see what you might have to lose from that list to make your budget balance. You’ll often find that by making a few compromises here and there that you can swing the pendulum across and find that now your income exceeds your expenditure. Once you can achieve this, then you have a balanced budget.
Often, we get into debt because we simply draw out money from the ATM in smaller amounts as and when we need it. The problem with this is that it becomes much more difficult to keep tabs on the amount we have drawn out over the course of any given month. A way to help manage this better is to work out how much you have left over for the remaining ‘miscellaneous’ spending – i.e. the money you’d have left to spend on all of the ‘luxury’ items you enjoy – those things you don’t need but simply want. Work the total out for a month, then divide that by the number of weeks in the month then simply draw the entire weekly figure out in cash. That then represents what you can spend over the course of any given week without going over budget. You’ll often discover that as you’re simply dealing with the amount of cash you have in your wallet or purse, and simply paying in cash and not using your bank card until the same day the following week, you can make your money go further and can curb your spending habits if you think the money won’t last until you draw out the following week. This all takes discipline, naturally, but it is the only way you can be sure that you’re not creeping into debt.
Finally, remember that a budget isn’t static. Wages and benefits can go up or down and bills etc, can fluctuate too – often upwards, it has to be said. So, you need to constantly review and revise your budget, if necessary and getting into the habit of reviewing this at least every 3 months or so, but, better still, at the end of every month, will enable you to stay on course, to make the most of your money and free yourself from the worry of getting into unaffordable debt.