WHAT IS BUDGETING?
Budgeting is the process of analysing your income and expenses.
It’s a system of managing your money – it puts YOU back in control, rather than it controlling you. It’s a brilliant way of being more organised with your personal finances, enabling you to have a clear picture of your spending and any debt, shows areas which can be improved upon, and gives you a clear sense of purpose in terms of future goals.
In the very simplist terms you take your monthly income, minus your outgoings and work with what’s left.
Yes, it takes a bit of work and dedication to keep to, but once you feel more in control of your money, it’s quite exciting to start planning for future spends and goals.
HOW TO CREATE A BUDGET?
There’s several methods you can go about creating a personal budget – using a spreadsheet, a smartphone app or just plain old pen and paper. I’m going to start my budgeting articles by going back to basics with the paper method. Why? Because it’s probably the simplest and putting this kinda stuff down on paper can be quite a cathartic process in itself.
Ready to get started?
It’s best to set aside a chunk of time for this so you can really concentrate.
Get your pen, paper and calculator ready…
We’re going to look at your last 3 months to give us a clear idea of where you’re at currently – so you’ll need to dig out your bank and credit card statements too.
Let’s get going…
#1 List your Actual Income (after tax)
Start by writing the last 3 months spaced-out down the left-hand side of the page, e.g. Oct/Nov/Dec. Then insert 3 columns across the top, the first entitled INCOME.
Beneath INCOME list down all the money that came IN that month – this could be your salary, benefits, refunds, cashback earned, payments from survey sites etc etc. Easiest way to find these is from your bank statement, but you may need to also refer to any other accounts you hold, e.g. PayPal. Don’t forget cash too, if you gained some then add it into the INCOME column.
It’s worth noting which of these income streams is fixed and which is variable, maybe highlight in a different colour.
#2 List your Actual Expenses
Title the second column EXPENSES and list down all the spending that went OUT that month. Again, it’s worth highlighting which were fixed and which were variable.
#3 Profit or Loss?
Now comes the fun part(!), let’s work out for each month whether you ended up in profit or at a loss. Start by calling the third column PROFIT/LOSS.
Use your calculator to add up all your INCOME for that particular month and write this total at the bottom of that month’s INCOME column. Do the same for the other two months.
Repeat this process for the EXPENSES column.
Finally, for each month calculate your TOTAL INCOME minus your TOTAL EXPENSES – what’s left? Write that in the third column.
You should end up with something along the lines of this (screenshot below):
Now let’s analyse this data using the example budget screenshot above…
You can see this person (let’s call them Bob) has a fixed salary each month plus some variable income. There’s 3 fixed expenses (mobile, mortgage and gas/electric). In the first month, Oct, they ended up with £60 spare in the pot, all good. However, in Nov and Dec you’ll see they ended up £40 and £30 in the red.
WHAT CAN BOB DO TO IMPROVE HIS FINANCES?
This is where the variable income & expenses (highlighted in yellow) can be utilised – he can change these. Bob can do either or both of these things – INCREASE his INCOME and/or DECREASE his EXPENSES. Doing both would be even better!
Bob could INCREASE his INCOME by doing more income-boosting activities, e.g. work online doing surveys and tasks for cash or sell his old things on eBay (see my related post: TOP 5 Ways to Earn Online in your Spare Time).
Bob could DECREASE his EXPENSES by looking at ways to cut back – e.g. buying secondhand-clothes instead of new, or buying brand-own groceries instead of the more expensive branded products.
Take a look at your personal Budget and see where you can make changes going forward.
#5 Planning Ahead
We’ve looked at the last 3 months, and hopefully this has helped provide you with a clearer picture of your basic monthly finances. Now, we can take this to the next stage and start to plan ahead.
WORK OUT YOUR FUTURE ESTIMATED EXPENSES
Take a separate piece of paper and list out all your regular monthly expenses, again it’s worth noting which are fixed and which are variable.
For the once-a-year or less regular items (e.g. car insurance, hair appointments etc) list them out and calculate their estimated monthly cost. E.g. car insurance at £200 a year would = £16.67 a month. You can also estimate the cost of future expenses e.g. car servicing/MoT etc.
This should now give you a clearer picture of your projected future expenses – it’s how much you should aim to be bringing in each month. What is the gap looking like? What can you do to bring in the extra money? Again, it’s like Bob, you can choose to either INCREASE your INCOME and/or DECREASE your EXPENSES.
Creating a Budget on paper is hopefully just the start of you taking control of your finances. Stay tuned to this site where I’ll be providing a Super Simple Budgeting template – editable and printable – in the near future… Watch this space! 🙂
An alternative to good old plain paper for your Budget is one of these purpose-built budget planners, Amazon have a lovely selection – I find if something looks nice and is tactile I’m more likely to use it, i.e. having a pretty diary or journal. You may find the prompts in these help with your budgeting:
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I hope you’ve enjoyed reading my Budgeting post – I’d love to know how you get on?