Budgeting Basics

The budget is the basis for any form of financial stability, from household to business to country.

So what is a budget and how will it help?

It’s not a magic fix to money problems, quite the reverse, it is a tool to help you see where the problems are. If you’re overspending then a budget will help you see where your problems are, but it won’t fix them. That’ll be down to you to spend less. There’s no other way to do it.

But it can make a big difference in telling you where your money is going. That £2 a day on a coffee, £3 on a sandwich and £8 on a pack of cigarettes? That comes to £4745 per year. Surprised? That’s where the budget will help you.

How do you set up a budget?

There are two routes to go down, you can either build your own budget or use a template. I would always recommend building your own budget, it’s tailored to exactly what you want see and is as simple as you make it. The problem with templates is that they can be incredibly hard to customise and get the information that would be useful to you.

That being said, there are good budget templates available on programmes like Microsoft Excel, there are great apps available for all phones and plenty of websites that will let you budget online for free. If you’d rather stick with something pre-made then this is the route to go down. Make sure you check out some reviews before committing to a format. You don’t want to waste time setting up your finances in an app that you stop using after a week!

From here I will focus on the very basic steps to create your first budget.

Step 1

The most basic version of a budget is simply a list of your expenses. Make a note of everything you spend, from the pack of chewing gum you bought when walking through town to the new car you’ve waited years for. Write it down. This will start the habit of noticing what you spend. How many times do you spend that 50 pence on chewing gum? How long did you save for the car? The simple act of recording this will start you being more conscious about your expenses.

If you find yourself forgetting then follow this one simple step.

Keep. Your. Receipts.

If you’re ever asked if you want a receipt, the answer is yes. You don’t throw that receipt away until you’ve recorded the expense. With pockets bulging with receipts, or a pile building up on the desk you will soon remember to keep records.

Step 2

Once you’ve got in the habit of recording all your expenditure it’s time to dig into that raw data a bit more. Divide your expenses into categories, just broad ones to start with as you can worry about subcategories later. A simple division would look something like this.

• Food
• Travel
• Bills
• Rent
• Miscellaneous

Start recording each receipt into a different category. This is the time that using a spreadsheet becomes a lot easier than a paper copy but if you’re not familiar with the software then stick to paper!

Over the course of a month, this will allow you to see how much you’re spending on each category.

Step 3

Now is the point that we get a bit more complicated. It’s time to set your budgets for each category.

Some of the categories, such as rent or bills, will be for a fixed amount so these can’t be set. So take your whole monthly income and take away these fixed costs. The remainder is what you have left to allocate. Let’s have an example using the categories above.

Alan earns £1000 per month.

He pays £500 in rent and £200 in bills.

As these are both set costs you need to take these off the £1000 before splitting the budget.

This will leave Alan with £300 per month to split between the final categories of Food, Travel and Miscellaneous.

How you do this split is entirely down to your circumstances but make sure you give yourself an exact figure to aim for!

Step 4

Sticking to your budget is the hardest part. Once you’ve spent your allocation for the month you have to stop spending money in that category, although for obvious reasons this isn’t always possible. If you’ve no money in your budget for food and still a week to go before the end of the month then you can’t starve. But when you buy food, make sure that the extra comes out of the allowance for another category.

These imbalances will happen frequently to start with as you learn which things cost you the most. Take a look back at where you’ve overspent and underspent at the end of the month and adjust your budgets accordingly. Prioritise the things that are the most important, food being a primary example, but don’t go overboard. If you can buy food on a lower budget by shopping more sensibly then maybe that extra money could go towards something more fun?

As you get used to budgeting you’ll get better at it in several ways. After a while you’ll know roughly how to split the budget into categories and which ones need more money in but you’ll also get a feel for what you can afford within your budget. You’ll automatically check yourself when shopping, to ask whether this means you’ll overspend and once you have set targets it is much easier to motivate yourself to meet them.

The important thing to remember is that budgeting is a habit. It takes time to form the right behaviour patterns but when you start following the process automatically the difference can be fantastic.

Budgeting gives you control over your finances and gives you the ability to make informed decisions about what to spend your money on and when you can afford it. Some of you will be content to keep this to a monthly level, being assured that you can meet your bill payments. Some of you will end up with a much more complicated budget breaking down your expenditure into weekly and even daily intervals, matching your costs down to a penny. Either way, it can give you more comfort and peace of mind when managing your finances.