After a decade of stagnant wage growth and unprecedented personal debt levels in the UK, it’s more important than ever, to have your financial house in order.
We know how busy most people’s lives are; be it working full time, caring for family or both. Often, staying on top of your finances ends up taking a backseat in the daily chaos. In our experience, most people’s debt problem is worse than they imagine – from the number of creditors to their total debt, many people lose track of their situation along the way. For most, doing a full audit of their financial situation sounds like a daunting prospect and a drain on their time.
It can seem difficult to create the right budget for you – let alone stick to it but a well-planned budget will help you stay on top of your finances and should leave you with you enough money to spend on necessities and the things most important to you.
We’re going to talk you through how to take the paralysing first steps. In this article, you will find clear, practical guidance on why you should budget; how to create a budget; and crucially, how to stick to it and avoid debt.
Whether you are working your way out of debt or planning to avoid it altogether, a plan of action balancing your income and expenses each month is essential.
A common misconception is that a budget isn’t suitable for those on a low income or with a high level of debt already. Instead, a budget will essentially show you a monthly ‘bottom line,’ the amount of money you have left after expenses each month – or in some cases how far ‘in the red’ you are, meaning that your expenses are higher than your income.
In reaching that bottom line, you will have laid out all of your monthly expenses. From that list, you will be able to identify where you can cut back on spending and eliminate any unnecessary payments which you can’t afford. As you record all the little expenses down you will notice how they all add up, and how small changes can go a long way.
Aside from planning to avoid debt, budgeting is also an essential tool when it comes to forward planning for positive goals. Start with ‘why?’ Why are you budgeting, and what do you want it to achieve for you? Clear answers to these questions greatly increase your odds of sticking to the plan. Whether it is pursuing financial freedom, getting out of the red and tackling your debt problem; or saving up to travel, place a deposit on a home or any one of life’s many bigger financial goals – you will need an ultimate reason to believe in your plan. Before you start, take a moment and note down:
- The big financial goals you want to achieve long term – like home ownership, starting your own business or a family or clearing your debts.
- An intermediate goal you want to achieve in the next year – like writing reducing your debts, building up a savings fund or enjoying a lovely holiday.
- Something you want to achieve in the first month – like making the necessary cuts to avoid maxing out a credit card or missing any essential payments.
A clear picture of what your budget will do for you in the long, medium and short-term will keep you motivated to follow your plan. Keep re-evaluating it with trial and error to ensure it leads you to those goals.
How to budget
In terms of how to set up your budget, there are several ways you can approach it – ultimately, the best method will be the one which works best for you.
A budget ultimately aims to help you arrive at an accurate, monthly ‘bottom line’ with an accompanying list of your monthly expenses. When trying to break down your income and outgoing expenses off the top of your you could easily leave out crucial costs which need to be accounted for in your budget. As such, you may want to use online tools to help you through the process. Money Saving Expert and the Money Advice Service offer online planners which set out an extensive list of common expenses you can fill in, and have the maths done for you. If you have a Google Sheets account they offer a free online budget template you can use to map all your income and expenses. These tools are comprehensive and should cover most of what you will need to include.
Once you have arrived at your bottom line and decided which of your payments are necessities we suggest that you automate payment of them.
Previously, we have spoken about the ‘piggybanking’ technique and reiterate that this should be at the heart of your plan.
With this method, you use separate online banking accounts and direct debit payments to ensure that your main priorities are always met. Our previous guide set out the key steps as follows:
- Step 1: Decide the main areas where you need to make savings and set a new ideal monthly spend in that area (the budget planner can help you do this.)
- Step 2: Set up a new bank account for each. Besides your main current account, always have a bills account and if you are self-employed a tax account.
- Step 3: Set up a direct debit from your main current account into each of these accounts. Schedule this for 2-3 days after payday
This way, your main current account will give an accurate picture of what you have available after paying off key expenses. When you use online banking – access to your current account balance on your phone allows you to continually check on it in real time, while knowing that all of your essentials are covered.
From here, you might want to keep a proportion aside for emergencies and unforeseen costs such as breakdowns or accidents. You could do so by following a similar process and automating a monthly payment into a savings account. By automating the transfer of money you need for essentials and an emergency/savings fund, you won’t see this money in your current account and reduce any temptation you may have to spend it unnecessarily.
Any money left in your account after deducting all bills and essential payments and your emergency fund will be yours to spend as you please – but be mindful and realistic of your budget, being careful not to overspend.
Sticking to your budget and avoiding debt
In truth, most people likely already know about the benefits of budgeting and have tried at least once to set one up. The hardest part of budgeting is sticking to it. We are confident that the automation process will prove very helpful and do some of the heavy lifting for you. Nonetheless, there are a couple more keys to success we feel you need to know.
Ultimately, you must be realistic. You may well follow a highly restrictive budget for a few weeks or even months. But over time many begin to slip when it comes to the ‘£5 here’ and ‘£10 there’ transactions, forgetting to evaluate their budget regularly. We’re all human, and your budget should take that into account. Account for what is important to you in terms of leisure, entertainment and your hobbies. Without being too lenient, reward and treat yourself in a way that will encourage you to make the necessary sacrifices – whether that is a nice meal out, a holiday or any other purchase within your means. A budget ultimately aims to change your habits, and small rewards are a vital part of this process. If you have a high disposable income but find yourself overspending on non-essential items Bank accounts like Monzo may help. Monzo gives you the option to create ‘spending pots’ – you put a set amount of money into each for say, entertainment, eating out or shopping and Monzo will keep you updated on where you’re spending money has gone.
In a position that you can’t budget your way out of?
Even having followed this advice, those with more serious debt problems would perhaps benefit more from a legislated solution. If you are in an increasingly unmanageable position, our specialist service, a Protected Trust Deed, could be an option for you to write off unaffordable debt and reduce your monthly repayments to one affordable sum.
We are FCA approved and our expert advisers have helped over 16,000 people like you, get out of debt. For an accurate assessment of whether a Protected Trust Deed is the right option for you, get in touch for a free, 100% confidential consultation with our expert team on 0141 221 0999 or find out if you qualify in 60 seconds with our Trust Deed Calculator.