Why every household needs a budget (and how to get started).
If you have ever felt that there’s not enough money left at the end of the month and that putting aside savings is near impossible, a budget could really help.
Before we go any further, we need to tackle the negative connotations that have been drummed into us about budgeting. You’ve probably said no to things in the past (usually after Christmas) because you are on a ‘budget’. You might have even bought a ‘budget car’ or taken a ‘budget holiday’. In essence, ‘budget’ is often used as shorthand for cheap and not spending money.
So let’s change that mind-set.
Budgets can involve big spending.
First of all, there’s a thing that the Government does each year with that famous red briefcase – it’s called The Budget and it involves more money than you or I could ever count. Its main purpose is to divide up how each pound of tax revenue will be spent on the NHS, roads or defence and to manage the payments on national debt. Whether or not they succeed is another question!
Equally, companies large and small must estimate how much money they are likely to generate from sales and then decide how much will be spent on things like marketing, reinvestment and payroll.
Whether your household income is £30k or £300k, try acting like the CEO of ‘You PLC’ and start giving every pound you earn a specific job to do and see your results take off.
Here’s a ground breaking and highly complex formula to work with, ready?
“Money-in must be greater than money-out”.
It doesn’t matter what you earn, whether you’ve won the lottery or if you are on the Sunday Times Rich List.
This rule applies to everyone that wants to get ahead in their financial life.
Money-In
The first step is work out what your ‘money-in’ number is. It is useful to know what this is both on a monthly and annual basis – the figure we need is net or after tax.
£30,000 a year income for one person is about £2,000 each month net or £24,000 each year.
£100,000 a year for one person is about £5,500 each month net or £66,000 each year.
These numbers will be slightly higher or lower depending on tax, pension contributions or if they are combined, household earnings.
Money-Out
The next step is to give every pound earned a job. You need a spending target. If you don’t have a target to aim at, you’ll miss it every time. Money has a habit of finding ways to escape unless you tell it what to do. So where to start?
A good place is your four-pillars:
Food and medication
Housing and bills
Clothing
Transportation
These cover the most basic needs for modern life. If you have money set aside for all of these then you should be all set to be out there, getting to work and putting food on the table. It may be a basic existence, but be it would be very easy to spend your whole monthly income on just these items alone.
What do you spend?
Start a column on a piece of paper and list the four pillars on the left. We can then start putting figures against them.
Food & Medication
Let’s look at food. The ONS says that the average weekly spend on food is about £65 per week or £3,400 each year – think about your last supermarket visit and how your food bill compares. Your income may support a weekly bill of £200 – write down a number. Also make a note of any additional money you need for medicine.
Housing & Bills
Next, let’s look at housing. Note that this needs to include all of your bills; from electricity to internet. The average mortgage payment is about £700 per month or £8,400 each year. Whereas the average cost for utilities including water, gas, electricity, phone, internet and TV comes to an additional £190 each month or £2,250 a year.
This makes an average total housing figure at £890 each month or £10,650 a year. Again, your figures will vary depending on the size of your house and when you bought it, but note down your number and we’ll move onto the next step.
Clothing
Clothing is a contentious issue. Some people like a new outfit every week and a wardrobe full of shoes, others prefer a few staple favourites that are worn until they fall apart. At this stage, it doesn’t matter what your number is, just think about what you spend and write it down. This must include everyone supported from the income, including your children.
Transportation
The same can be said for transportation. If you live in a city you may not need a car and public transport suits you fine. If you commute to London, you may need a private car for weekends but have to spend huge amounts on a season ticket to get in. If you do run a car, don’t forget to include your insurance, tax. MOT, servicing, tyres, fuel etc. Look at what you spent last year and note down your figure.
Adding it all up
So far we’ve covered the four pillars. Add up your figures and deduct them from your money-in (net income) figure. How much do you have left? We haven’t even thought about holidays, retirement savings, investments, money for children’s education, childcare, weddings, pets, hobbies or the big one – debt repayment.
Do a bit of digging through your bank statements from the past couple of years to see how much you spend on each of these items and note down the category of spending and the annual or monthly cost.
Add up everything in your spending categories into one big annual figure. How does this compare to your total annual money-in figure? If money-out is greater than money-in, you have a problem and you’ll likely be going deeper and deeper into debt to cover the shortfall. The good news is that now you have the number, you can work on improving your budget to balance the books.
Balancing the books
Try to look for the easy-wins to reduce your outgoings. Could you sell your car and buy something that’s a bit cheaper to save on fuel, tax and payments?
Another easy win is your holiday. The average Brit goes on holiday twice a year, spending £855 per person each time. This means a family of four would spend in the region of £6,840 a year on holidays. If you wanted to cash-flow this from your monthly income and not go into debt, you would need to set aside £570 each month! Think about staying a bit closer to home or reducing the number of trips you take.
Saving for big events is also another area for easy savings. The average UK wedding costs £32,000. If you were to save up for this for three years, you will need to set aside nearly £890 each month! There are likely to be options for cheaper venues, less extras and perhaps a slightly smaller guest list.
The benefit of a budget
In summary, a budget puts you in control. You are the boss of your income and you can control where it’s spent - turning down one category slightly can free up money for another. What’s crucial is that you know where you are and that you are no-longer cruising on autopilot.
There’s a lot to take-in, so there are some useful tools out there to lend a hand. Like this simple budget planner and there are also several apps that reduce the legwork.
How well do you stick to a budget. Are you in control of your monthly outgoings? If you need a hand with planning your finances, you can contact a member of our team. Don’t forget that this article offers information about financial planning and should not be taken as personal advice.