Although adding and subtracting money seems like a fairly simple operation, especially with a decimal currency, learning how to budget is more complicated. Sticking to it is where people falter. It’s important to know where your weaknesses are, and keep yourself on track.
The most obvious yet underrated skill to build is to monitor your spending. The benefits of this goes a long way in saving you from debts and heartaches. This could be done by jotting, using a spreadsheet, or entering everything you spend into an old-fashioned account book. Simple, but effective, because you can see exactly what you spend each month. It also has the advantage that you have to consciously think about every entry, meaning that you are always very aware of every expense. You may occasionally make mistakes in your recording and arithmetic, but a little consistency would eventually give you significant progress.
Working out your income and expenditure. If you’re employed, receive a pension or benefits and have a regular monthly income, this is relatively easy; it’s your monthly income, less any deductions, taxes, pension payments and the like.
If, as is increasingly the case for many people, you’re self-employed, or you receive an hourly rate depending on how much you work, then this is harder to work out. Probably the best way to do it is to look back at your monthly income over the last six months or so, and take an average. If you receive a periodical payment, probably from a student loan/allowance, contract adhoc work, then you need to do your budget on a termly basis, not monthly.
Self-awareness in terms of money. Self-awareness can help people understand where they spend their money impulsively and how to control it.
Getting help through delegation. Once people know where they struggle, they are more inclined to work on those areas.
Being organised can help. It’s hard to be financially successful if you miss payments or lose paperwork. Late bills can not only hurt your credit, but also result in late fees.
Critical thinking. There are tons of financial scams out there. Be smart; if it sounds too good, it may well be a scam. Think things over before you spend money, whether it’s $5 or $500 dollars.
Steps to aid you improve these skills are; Work out essential expenditure on fixed price items such as any unavoidable fees, bills and loan repayments. It will probably also include your rent payments, council tax, electricity and gas bills, water bills, phone, broadband and other utilities. Also any insurance that is paid monthly, for example, buildings, contents or car insurance.
Annual payment would be the trickiest to navigate. It makes sense to divide these annual expenses into 12, and set aside an amount each month to cover the yearly cost. If you can’t remember the precise amounts, check your bank statements, as these will include any direct debits and regular payments as well as one-off amounts. Do not be tempted to guess.
Work out essential expenditure on non-fixed price items eg food and groceries, travel and/or commuting expenses, clothes and personal care that could end up as miscellaneous costs.
Again, don’t be tempted to guess. You will almost certainly underestimate wildly. Instead, look back at your food and household products bills for the last few months. Although this may not be exact, they should give you a reasonable idea of your average monthly expenditure on food and household items like laundry detergent and other cleaning products.
Work Out Discretionary Spending Amount. Basically, what’s left at the end is what you can spend on other things, whether hobbies, luxuries, entertainment, or a holiday fund. If there’s nothing left, then you have no discretionary spending.
Subtract Your Monthly Essential Expenditure from Your Monthly Income. With luck, the answer is positive, because otherwise you need to either earn more money, or spend less than you are already doing, both of which may be difficult to achieve.
Set Aside a Sum for Contingencies. You will have forgotten something from your essential expenditure. This is not only likely, but an immutable law of nature. What’s more, the laws of nature being what they are, you will inevitably discover it during the month that you have to pay for something else unexpected and large, such as the car or some major appliance breaking down.
It is therefore essential to set aside a contingency fund. Realistically, the amount of your contingency fund will need to vary depending on the difference between essential spend and income. But as a general rule, set aside as much as you can afford.