As we have discovered, there are plenty of ways to save money, but before you can start, you need to have a good understanding of what you earn and what you spend.
The best way to understand your spending and earnings (and to manage your money) is to create a budget. This should clearly show:
- What you earn each month
- What you spend each month (and where you spend your money)
Once you have set up your budget, you can then use it to understand what items of spend you can cut out or reduce or whether you can find cheaper alternatives.
You can also use your budget to manage large annual costs, such as car services, family holidays and Christmas time. Putting some money aside each month for these costs will help to ensure you can cover them without having to rely on your overdraft or credit card.
How To Create A Budget
Spreadsheets like Microsoft Excel or OpenOffice Calc are generally the easiest tools for creating and managing budgets, but pen and paper can work just as well.
To help you along I’ve created a budget template that you can download for free.
Step 1 – Make a list of your monthly incomes and the amount you receive from each one
These are likely to include:
- Your primary income
- Your husband / wife / partner’s income
- Second job income
- Part-time business income
- Any child tax benefits / social support income
- Pension Income
- Stock / share investment income
- Buy-to-let investment / lodger income
- Bank or bond savings income
When listing the value of each monthly income, ensure you use the after-tax and national insurance value rather than the pre-tax and national insurance value, as this will provide you with a much more accurate view of what you can actually spend each month.
Step 2 – Make a list of all your essential spending
These are all of the basic outgoings that you are committed to and therefore would be very difficult to live without. It is important to be honest with yourself and be as accurate as possible when listing this spend, otherwise you will have an unrealistic view of your financial situation. Essential spending is likely to include:
- Rent or mortgage
- Council tax
- Home / contents insurance
- Gas
- Electricity
- Water
- Food shopping
- Home repairs
- Television licence
- Car insurance
- Life insurance
- Telephone
- Broadband
- Mobile Phone
- Travelling to work costs
- Health care or health insurance
- Dental care or dental insurance
- Car maintenance costs
- Child care cost
Step 3 – Now make a list of all your non-essential spending
Such as:
- Cable or satellite television
- Gym membership
- Holidays
- Breakdown insurance
- Work-day lunch
- Eating out
- Entertainment (pubs / bars / theatre / cinema / etc)
- Cigarettes / tobacco
- Pet food / pet care
- Clothing / fashion
- Hobbies
- School fees
- Supporting dependant relatives
Step 4 – Finally make a list of any debts that you owe and how much you pay back on them each month
These are likely to include:
- Credit cards
- Car loan
- Unsecured home loan
- Secured home loan
- Hire purchase agreements (for example agreements taken out against a new television or sofa)
- Loans from friends / family / work
TIP: To get an accurate idea of what you are spending on each item each month, read through your previous bank statements or write down each item of expenditure and it’s value in a notebook for a period of one month.
Step 5 – Now that you have all spending and earnings written down, you can begin to look through them and get a better understanding of your financial position
The first thing to do is add up all your monthly incomes and then add up the three different lists of monthly expenditure (essential, non-essential and debts). If your total earnings are higher than your total spend, then you are not in too bad shape – However if your spending is higher than your earnings, then you could be on the path to financial ruin and it is important to take immediate action in order to re-adjust the balance.
In either case, your budget has told you where you stand financially at the moment and helps you to determine your financial goals, such as:
- Paying-off your credit card debt
- Saving more money for a rainy day
- Moving from being ‘financially negative’ (spending more than you earn) to become ‘financially positive’ (earning more than you spend)
Click on this link for some great money saving ideas that you can use to reduce your monthly spend.
