Obviously none of us know what lies around the corner, but drawing up a proper budget can really help to strengthen your financial security.
The more aware you are of your financial position, the more likely you are to keep your spending within your means, and take a great pleasure in it! Head-in-sand approach can encourage spending sprees that take your household expenses way over budget, and create a psychological downward spiral.
What is a budget?
A budget is a forecast of how much income you have coming in (usually on a monthly basis), and how much you plan to spend on both ‘essential’ and ‘non-essential’ items.
This helps you to focus on exactly what it is that you should spend your money on, and demonstrates what you are spending your money on.
If necessary, changes can then be made which will improve your household finances.
What is your income?
First of all you need to establish what your income is (after tax) on a monthly basis. This should include all income – earnings, state benefits, rental income, and investments. As long as it is income that you can rely on in the near future, it should be included.
Then you need to establish where the money goes on a monthly basis. You should begin with ‘essential’ expenditure. This is typically:
- Mortgage or rent payments
- Household utility bills
- Transport costs
- Essential insurance (car, buildings, household etc)
- Basic household food and toiletries
- Credit card / loan payments
- Basic clothes
These expenses keep you alive and keep a roof over your head. With the exception of food and clothes, these are usually fixed monthly amounts, so you can itemise these on your budget sheet in advance.
When it comes to food and groceries, to enable you to budget a fixed amount, it’s a really good idea to have one weekly shop, for essential items, and pre-planned menus. Other impulsive food purchases can come under ‘Luxuries’.
The next section could be items which are extremely important, but not ‘essential’. For example:
- Personal insurance – life insurance, medical insurance etc.
- Regular pension / investment payments
- Gym membership
- Satellite TV
Again, these usually have fixed monthly payments, so you can budget for these in advance.
This section is very important, as it is often where most changes or savings can be made – therefore it is vital to be honest. Typical luxuries could be:
- Eating out and socialising
- Non-essential clothes and toiletries
- ‘Daily vices’ – take away coffees, lunches, magazines
These items are obviously ‘ad hoc’, and you are ultimately in control of how much of your income you allocate to them.
The ‘luxury’ list can be as short as the above, or as long as your arm. The best way to gain control is to write down every single thing that you buy on a daily basis for at least 3 months. This has two advantages:
- It will give you a reality check
- You can then give yourself a meaningful budget for each type of luxury item
Why do I need a budget?
Now you know in black and white how much money you have coming in, and you have a pretty good idea how much money is going out, and on what.
If the sums do not work out, changes have to be made – either more income needs to come in, or less needs to go out (a more realistic prospect for most people).
By itemising all your expenses, you can really focus on where money can be saved, and how it can add up. Hundreds of pounds can be saved a month by:
- Reviewing your mortgage
- Reviewing your utility providers
- Review credit card rates
- Careful recipe planning
- Review insurance policies
- Cutting back on luxury items
So much to gain
As well as the personal satisfaction that a proper household budget can give you, the savings can make a significant difference to your life. You could start to make a real dent in debts that may have hung over you for years, or if you have no liabilities you could actually start to build up an emergency savings cushion.
Henrietta Oxlade is an Independent Financial Planner with Radcliffe & Newlands and MyFamilyClub’s in-house finance sage! She has been advising individual clients since March 1988, which is why many of her clients consider her part of the family. If you want to contact Henrietta, email us on [email protected] and we’ll put you in touch.