Being able to budget effectively is one of those abilities that some people seem to have, while others really struggle.
And yet it is an absolutely critical skill for anyone who takes their financial responsibilities seriously. Those who manage it successfully are well on their way to being able to realise their financial goals, whatever those might be, while those who find the process harder will be constantly up against it.
So, what are the secrets to being able to budget successfully? Are there a few simple steps we can all take to begin managing our financial lives a little bit better, in order to be able to meet the financial goals we have set ourselves? We think there are.
Before we get into them however, it is probably worth quickly explaining exactly what we mean by a budget in this sense. It is, in the simplest terms, a way of monitoring and managing exactly how much money someone has coming in and how much they have going out of their accounts each month. Whether you are running a business or if you a managing the budget for your family, having a clear idea of the status of these running totals on a regular basis – usually monthly – is absolutely crucial. So, how do you go about doing this effectively? Here are a few tips.
Forget the fear, and just make a start.
Too often, people avoid dealing with financial matters and in our experience this is never a good idea – small issues can rapidly get worse if they are not addressed. Of course, everyone has their own reasons for this, but often when it comes to budgeting it is because they are worried about what they might need to change.
They may be concerned that if they start digging too deeply into their monthly income and outgoings that they will find that they need to cut back on the things that they enjoy most.
And this might well be the case – but that shouldn’t stop you from starting the process. The chances are it won’t be as bad as you think it will be – and if you don’t investigate where the issues are now, it will only get worse.
Understanding key terms
As we’ve mentioned, a budget is essentially a breakdown of what money comes in and what money goes out, every month. But within that it is also important to define the different kinds of income and expenses that make up this bigger picture.
So, which of your expenses are fixed (for example a mortgage payment, or a payment on a car), and which are flexible? And what makes up your income? Do you receive regular payments (for example, a salary, a pension, or investment dividends), or is your income more varied (for example if you work for yourself)? Categorising all of your incomings and outgoings in this way will help you to build a clearer picture of your financial situation.
Assess your situation
We usually recommend starting with your income – taking into account the money that is coming in from every source. If all of these figures are regular and reliable this is relatively straightforward – just add them all together to get a total monthly income figure. If they are more variable, then look at the monthly totals over a longer period – for example a year – and work out an average monthly income from those figures.
Once you know your income, look at your expenses, starting with the fixed outgoings. Again, combine these together to give you a monthly total outgoings figure. Once you’ve got these two figures – your total monthly outgoings and your total expenses, subtract the expenses figure from the income and see what you have left.
For some people, this stage might be the end of their budgeting experiment – they might see they have a bit of money left over and congratulate themselves, or they see a negative figure and try to forget about it.
Clearly, this is missing the point of the exercise. The next stage is crucial – a thorough examination of where you can make changes to your spending habits. Thinking of them as ‘habits’ is really important – it is about identifying those things that you do regularly that might be having a detrimental effect on your budget, and trying to eliminate them, or at least cut them back. It might be as simple as spotting that you spend £30 a month on bottled water to go with your lunch – and addressing this by investing in a reusable bottle and drinking tap water.
These kinds of small changes might not seem like much, but the beauty of a budget is that you will very quickly see how they add up to make a real difference to your overall financial health.