The cost of living in the U.K. is constantly on the rise and, no matter how small your family is, you’re likely to get hit by the rising prices. Hence why so many families all over the U.K. are starting to rely on budgeting. The average household generally spends around £587.90 per week[i] and, although it varies per family, this adds up to about £2,351.60 per month. And that’s a lot of money. A budget could help you cut these costs down enormously. The perfect way to find out where all your money goes, lessen the costs, get out of debt, and create healthier spending habits, the benefits of budgeting your money are endless. To help you get started, we have the ultimate guide to budgeting, with advice on setting up a budget, choosing a plan, tracking your spending and how to save money in the long run.
What Is A Budget?
A budget is a spending plan that considers the collective income and outgoing expenses per person or family. It approximates how much money a person or household will make and spend during a specific period, like a month or year. Whether it is made on paper or an app, a budget helps people see what they’re spending their money on, meaning that they can handle it better and put it towards the necessary things.
Why Should You Budget?
If you get to the end of the month and can’t understand where all that money’s gone, a budget is essential for you. Ensuring you always have enough money to cover expenses (and for any surprises along the way), a budget provides a person or family with financial security. In addition, setting up a successful budget will help you get out of debt, lay out your long term goals, put a stop to bad spending habits, and lead to a more secure retirement. Also, a budget relieves stress and anxiety, resulting in better sleep, a boosted immune system and several other health benefits.
How To Budget
Sticking to a budget can be tricky, so choosing the right plan for you and your income is vital. Here are the best ways to help you budget your money:
Know Your Income
Before you start saving money, you have to figure out how much you have. So first, work out your income once tax, insurance and any other deductions have been taken off. This will show you how much you have to work with and encourage more mindful spending. In this step, make sure you consider all income streams, including your main job, any side jobs, benefits, child maintenance, saving interests, and pension incomes.
Understand Where Your Money Goes
Now you know how much money you’re getting, you have to figure out where it all goes. Go through bank statements for the past month or two, and find out where you’re spending the most money.
Begin by pinpointing the regular monthly outgoings, like the bills, direct debits and payments that you make routinely. Consider:
- Essential Bills: Steady fees such as council tax, electricity, gas, rent, mortgage, water, broadband, landline, mobile and insurance.
- Luxuries: Monthly services like gym membership, TV subscriptions, and music or magazine subscriptions
- Debts: Things that you are still paying off like financed items, student loans, credit card bills, bank charges, and any loans
- Savings: Money you pay into savings accounts for yourself through direct debits or standing orders, investments or pension payments.
Then, consider the money you spend outside these regular payments, on essentials like food and clothing or indulgences such as social gatherings and hobbies. Think about:
- Essentials: Food, household supplies, clothes, toiletries, medicine and First Aid equipment, childcare commuting fees.
- Luxuries: Eating out, hobbies, takeaways, social gatherings, sports, gardening.
Finally, take less frequent spending times into account. Things like Christmas, birthdays and holidays can blow a hole in a budget, so planning for them within your spending plan will prepare you, and your finances won’t take too big of a blow.
Create Healthy Spending Habits
If you’ve worked out your regular incomes and outgoings and come to the agonising realisation that you’re spending above your means, don’t panic. There are ways that you can get out of these bad practices by creating healthier spending habits as you start putting your budget plan into action. Begin by tracking every penny you spend so you can see where you fall down and, if possible, take steps to spend less in these areas.
Be mindful of what you spend your money on – make sure it’s 100% worth it before making the purchase – and consider what you can afford with everything you buy. A good rule of thumb is to leave something in your online basket or the store for 1 – 3 days, and if you still feel like you need or want it, then you can spend that money.
Choose A Realistic Budget Plan
With your income, outcome and spending habits laid out, you can start looking at budget plans that will suit you. Several methods out there have helped people with their budgeting aims, each with its benefits. To help you choose, think about your reasons for saving, what you’re saving for, how much money you’ll need, and when by. Here are two popular budgeting plans that may work for you:
Envelope
A systematic way of paying bills, saving money, and having a personal budget, the envelope budgeting system involves setting up categories for your expected outgoings then outlining spending limits for each one. Examples of categories you could include in this system are gas, electric, children’s items, pet care and clothing – anything that you regularly spend a significant amount of money on.
Then, write the name of each category on a separate envelope, along with the spending limit. Once your wages come in, divide the allocated money between the envelopes. Whenever you need to buy something within one of these categories, only that envelope goes with you, so you don’t spend over that allocated amount. You mustn’t take money from other envelopes if one runs out because this means you will be short for that category and will set the entire plan back.
Since cash isn’t so popular these days, envelope budgeting software like ‘You Need A Budget’ can divide your money into virtual categorised envelopes for you.
50/30/20
The 50/30/20 rule is to help you manage your overall spending as soon as your paycheck comes in. The aim of this strategy is that you spend 50% of your income on essential needs, 30% on wants and luxuries, and 20% on savings. This means that all bases are covered – bills are paid, money is put into savings, and you get to spend some on yourself.
The 50/30/20 rule may sound simple, but it could require some significant changes in your current spending habits. If this change would be too drastic, you could specify how much you are already spending on each area and alter the percentages accordingly.
You don’t have to choose a specific budgeting plan if you don’t want to. If you have a realistic way in which you’d like to divide the money that works for you and your spending habits, then that will be fine. As long as you have a laid-out plan on how you will be budgeting, you should be okay.
Set Up An Emergency Fund
Having a secure budget plan is all well and good, but life very rarely goes to plan. Setting up an emergency fund alongside any savings you may have is a good idea to prepare for potential issues in the future. With an emergency fund, you won’t have to sacrifice any plans, savings or extra money when problems crop up. A general rule of thumb is to have at least three months of your essential outgoings in an emergency fund, which should be enough to cover these expenses plus any extras. If this is not possible, add as much as you feel you can afford each month to lessen any blows significantly.
Pay The Bills First
Get the essential bills out of the way as soon as possible, so you know what you have left. Also, pay into your savings early too. This will stop you from going over budget because you know exactly how much you have to spend, plus it gives you a little extra in the future. If you’d like, you could set up standing orders or direct debits on bills and savings payments – this means that everything will go out automatically, and you can spend the rest of your money guilt-free.
Track Your Spending
Once you’ve established your budget plan, you have to start sticking to it. To help you do this, track everything you spend – make a note of what it was, how much it cost, and whether it was essential. This will help you see where you’re doing well and where you’re falling and adjust your habits accordingly.
Make Cost-Effective Choices
To help stick to a budget, you must make cost-effective choices in every aspect of life. Choosing economical options, especially for essentials like bills, will leave you with more money and less stress. For instance, if you’re looking to reduce your gas bills, the cost of underfloor heating may add up to less than regular heating for you in the long run. Although installation costs may not make it seem like a cheaper option, the amount you’d save on the bills would result in money saved rather than lost. Although this may take regular effort (when the price of electricity rises, for example, you will likely find it cheaper to switch providers and get a better deal regularly), the amount you save will it make worth it.
Don’t Be Hard On Yourself
Budgeting is hard. If you do go over a budget, don’t panic too much. Instead, acknowledge where you’ve gone wrong and try to do it differently next month. If you’re constantly going over budget, though, you may be using an inappropriate budgeting plan. Try a different approach to see if it works better for you – make sure you’re realistic with your expectations and keep trying until you find something that suits you.
If you find yourself struggling for money, the government offers a budgeting loan for essentials. There is no set limit on how many budgeting loans you can have in a year, but remember that everything you borrow you will have to pay back eventually.
Money, Money, Money
Once you have a budget set up, the most challenging thing can be sticking to it, but you have to! But, if you’re careful, monitor your spending and regularly update your plan to match with rising prices, you should soon get that amazingly freeing feeling of having complete control over your own money.
Do you have any budgeting tips? Let us know in the comments below.
Sources
[i] https://www.moneyadviceservice.org.uk/blog/how-does-your-household-spend-compare-to-the-uk-average