Budgeting doesn't have to be a dirty word. In today's society, the word seems to have become synonymous with poorness. Like, I'm struggling to make ends meet and therefore I need to budget. I disagree with this. No matter how much money you have, I believe it's always a good idea to look at how you're spending it.
This is something I have always been particularly bad at, especially in my student years. I make myself a new budget in the form of an excel spreadsheet and then…two days later I've forgotten it. And then, I do it all over again a few months down the line. This, my friends, is not how a budget is supposed to work!
Before I begin, I will say that I'm not a financial expert, I'm just speaking from my experience of what works. If you're in serious debt or worried about your finances I thoroughly recommend seeking help.
The Benefits of a Budget
Obviously there are some big benefits to being sensible with your money.
First off, you'll have more of it
I know that kind of sounds crazy, you're not getting paid to budget after all. But it will definitely feel like your earnings are stretching further than they used to. That's because you'll be more conscious of what you are spending money on. When it comes to creating your budget, you'll most likely end up limiting the amount you spend on certain things, which helps out massively in the long run!
You'll get into healthy habits
With budgeting comes moderation. Limiting yourself to say, one coffee & cake trip per week, will not only help your bank balance but also stop you from indulging too often! Simple tricks like packing leftovers for lunch rather than popping out for a £3 meal deal will soon save you loads – and the temptation of a pack of biscuits near the tills is gone.
After a while, you'll find yourself hesitating before spending money on stuff like this, because you'll be in the habit of restricting yourself.
That rainy day fund 🌧
Whether you're saving to pay debts, afford a holiday/big purchase or simply want to have an emergency supply (The Money Advice Service recommends that you stock up a saving of 3 months worth of outgoing costs), budgeting will help you get there.
This is down to the simple fact that you're planning in X amount each week/month dedicated to whatever you're saving for. Once you become restrained/comfortable enough to leave that money alone, you'll be on your way to saving success in no time!
Treating yourself will feel so good!
While I would heavily recommend that you stick to your budget forevermore, there will come a time where you don't have to worry so much about money. Once I've paid off my overdraft, you can bet I'll spend my extra cash on a little shopping spree!
Depending on how strict your budget is, treating yourself will feel amazing. That's because it won't be a regular thing. You'll have worked really hard to get to the point where you can splash out on a new camera or a car. Not only will it feel amazing that you earned that money, it will feel amazing that you worked even harder to save it up and buy sooner than you might have done without a budget.
You'll improve your credit score
You may not directly improve your credit score with a budget, but getting into the habit of making regular payments (to a credit card debt or a new direct debit for example) will certainly help you. Budgeting will allow you to make these regular payments. You can read a bit more about how budgeting can help with your credit score here.
Planning will be easier
Finally, when it comes to new expenses, you'll quickly be able to work out whether you can afford them by looking at your budget. Spotify Premium? Graze box? Gym membership? No problem! Once you've learned how much extra money you have floating around each month, you'll be able to refocus your spending on those little luxuries.
Creating a Realistic Budget
You can create a budget really easily and if you're on top of your finances, it won't even take you long. You can use a simple spreadsheet or there are plenty of handy online tools like this one.
1. Calculate your income
The obvious first step is to work out exactly how much money you have coming in each month. Without this, you won't know how much you're dealing with.
If you're not sure, or don't have a regular monthly payment, then I would suggest working out your budget according to any income you're certain you will be receiving. I'd be hesitant to put anything down that isn't 100% certain (e.g. eBay sales or a future pay rise). You wouldn't want to end up short because you thought you'd have more money than you do.
2. Calculate your outgoings
Again, this is a pretty simple one! Work out how much you pay in bills, rent/mortgage, food etc and add it all up. In an ideal world you'll have less outgoings than you do incoming. If that's not the case, I'd highly recommend you talk to an expert!
Personally, there are two ways I would split this:
A) Essential vs Non-Essential
B) Standing Orders/Direct Debits vs Other
Obviously prioritise those things that are essential and already due to leave your bank account as you could end up with fines and debt if you default on these payments. They can also really mess with your credit score.
3. Categorise and budget your additional spending
Take a long look at the non-essential/other list of your outgoings and work out exactly what you could cut back on. There is no saying that you have to cut anything out, but at the very least you should set yourself a ballpark figure for each category of spend. For example: £20 a month on cinema trips.
At this point, budget for things you want to spend your money on. Add in a 'savings/debt repayment' column, even if you only have £5 to spare! Money adds up, so no matter how small the spend, it's totally worth working out.
The key here is don't be too strict. You'll set yourself up to fail if you limit yourself too much. Remember that you can always revise your budget if your spending patterns change in any way.
4. Work out your weekly budget
I would really recommend working on a weekly budget rather than monthly, because it's a constant reminder/tracker of how your spending is going.
For things you spend monthly, I would split the cost into weekly amounts, even if you might only spend that lump sum in one week. If nothing else, you'll know to save that £5 each week for the bigger purchase later on.
5. Set yourself money goals
Work out exactly how many months it should take to save/repay a certain amount of money and use that as your motivation to stick to your budget. Obviously there will always be unexpected spend, so personally I'd add on an extra 3-6 months to that time.
6. The 50/20/30 Rule
If possible, look at whether the 50/20/30 rule of thumb suits you. This idea revolves around spending 50% of your monthly income on essentials/fixed costs, 20% on financial goals and 30% on flexible spending (i.e. whatever you want). It won't suit everyone (I worked out that my fixed cost/essentials is currently at 75% of my monthly salary…), but it seems like a really good thing to work towards.
Biggest Budgeting Mistakes
Here are some of the top mistakes people make when it comes to budgeting – hopefully this helps you work out what to avoid doing!
1. Being strict with your budget
Life is short. Making it miserable by restricting yourself massively is not the way to go about budgeting. Be sensible with your money, for sure, but if you can afford not to, make sure that you've got treats planned into your budget too.
2. Under-predicting spend
Be a little more generous with aspects that are not so clear-cut. It's always better to spend less than the budget than to over spend – and any money left over at the end can go towards savings or debt repayment!
3. Not factoring in emergency spend
You will, at some point, have to spend money you didn't foresee spending. This is more reason to be lenient and make sure you've got some extra cash!
4. Assuming extra income
Don't budget according to income you won't definitely be receiving! Instead, redesign your budget or pop anything extra straight into savings.
Managing money can be really hard, I know. I've been at points where I just want to curl up in a ball and cry about it. Just remember that you can get through it with a well-designed budget. If you're in over your head, seek help! There is no shame in it.
6. Forgetting about it
Hold yourself accountable when it comes to your budget. Write it down and stick it on the wall. Tell your friends and family about it. Write a blog post 😉
7. Keeping all money in one account
Open up a savings account in addition to your current account, so that you have a visual of how much you're saving and you don't accidentally dip into it. Set up standing orders/direct debits to leave your current account. Additionally, I'd recommend using a pre-paid card like Monzo for your day-to-day spending. The best thing about this is that it'll categorise your spending, so there's no getting away from that budget!
I think that just about wraps up this post – sorry it's so long but I hope it's useful for you! I'm using all of this for myself too, so I'll be sure to keep you posted on my own journey.
Anything to add? Feel free to share your opinions!