With household budgets coming under the biggest squeeze for decades, it can be difficult to keep on top of your finances. However, making a budget – and sticking to it – can make the difference between feeling like you’re managing your money and feeling like it’s managing you.
The key to budgeting is to plan your outgoings so they fall within your income.
Much spending is ‘invisible’, so the first step towards setting a budget is to record everything you spend over the course of a month. If you share finances with a partner, make sure they do the same.
It’s important to include everything you spend, no matter how small – even a daily newspaper can add up to over £30 over the course of a month, and a daily take-away coffee even more.
Record all your spending onto a spreadsheet of your own design, or an app or online budget calculator with pre-determined spending areas to guide you.
Unless you use a portable app calculator on your phone, you may want to carry a notebook around with you to make sure you record all your spending throughout the day, and then enter this information into your computer when you get home – it’s easy to forget the small amounts of spending that add up over the longer term.
Unlike the best app calculators, online calculators are usually free to download. The online calculator on the Financial Services Authority’s site enables you to log each typical area of expense (such as travel, household expenses, leisure) by the easiest frequency – weekly, monthly, quarterly or annually.
Keeping a spending diary may seem tedious at first, but it’s essential in helping you to spot areas – however small – where you could easily economise.
Don’t simply enter spending from your diary: to make the findings as accurate as possible, remember to enter less frequent outgoings such as holidays, birthday presents and Christmas costs, as these may form a large chunk of your annual spending.
Make sure you include utility and insurance payments – refer to bills from the last year if you need to, and check your bank statement for any ‘invisible’ direct debits, such as council tax, gym membership or magazine subscriptions.
Check your payslip too, for deductions such as pension contributions and student loan repayments. Lastly, review the list to make sure you haven’t forgotten anything.
This may be the more enjoyable part! Record all your sources of income and enter them on the relevant part of the calculator or spreadsheet you’re using.
‘Income’ doesn’t just mean you and your partner’s salary: it also means any tax credits and benefits, interest on savings and investments and rent from lodgers. You’ll need to record whether these are monthly, quarterly or annual in order to work out your total annual income.
Review your calculations to see which is the greater figure – your annual income, or your annual outgoings.
If your outgoings exceed your income, follow our Action Plan below.
If you’re heading for a shortfall that you can’t afford, you will either need to trim your spending or find sources of further income.
You may be able to increase your income by doing something as simple as ensuring that you claim any benefits to which you’re entitled – billions of pounds worth of tax credits, for example, go unclaimed every year. See our previous article on easy ways to make money for information on this and many other ways to boost your income.
The most effective way to get your finances back on track is likely to involve trimming your spending.
You can do this by identifying what you really need to buy, and what is a luxury. The ‘outgoings’ section of your budget calculator should help you to identify problem areas of superfluous spending that you can easily cut down on. These might include:
Expensive take-away coffees or lunches at work – plan ahead and make your own lunch to take to work
Impulse clothing buys – when going shopping, work out what you need and how much you can afford to spend beforehand
Excess food shopping – make a list before you go to the supermarket, and stick to it
Restaurant meals – choose from the cheaper set menu and ask for tap water rather than bottled
You could also set yourself realistic, short-term goals, such as ‘spend no more than £50 a week on food’ or ‘no more than £30 a month on clothes’. If you can easily manage to reduce your spending to these amounts, you could set yourself tighter targets until you feel your main spending is as lean as it can reasonably be.
You don’t need to cut out treats completely – simply by cutting down on your excess spending you may be able to save enough money to properly relish indulging yourself occasionally.
Another way to cut down on your spending is to look into whether you could get a cheaper deal on your electricity and gas supply, TV/landline/Broadband contract and mobile phone tariff:
You can often get cheaper ‘bundle’ deals if you buy all your energy and telecommunications products from the same supplier.
If you don’t use your full free calls/texts entitlement on your mobile contract, you could get a better deal by changing to a cheaper tariff.
If you need to take more serious actions than these before you can live within your means, however, consider the following suggestions and follow those that best apply to you.
Prioritise your monthly expenditure, making regular payments to meet your mortgage first. You could help ensure you have the funds to pay the most important bills by arranging for any essential direct debits – such as mortgage, council tax or utility charges – to come out of your account shortly after your pay day.
If your over-spend is large, you could open different bank accounts for each large area of expense (ie household bills, food, Christmas, holidays) and set up regular payments into each account every month. This way, you know the money in your main account is actually ‘spendable’. This means you’ll know how much money you have available to spend on, say, your holiday – and you won’t be able to over-spend.
Depending on the extent of your over-spend, you could reward yourself after a successful month by allowing yourself a treat, such as a meal out that costs a small proportion – say 10% – of the amount by which you’ve cut your spending.
Keep your budget updated throughout the year, to make sure you keep on top of your spending.
If you have debts that you can’t afford to pay, don’t bury your head in the sand. There are a number of bodies that offer free, impartial advice, including:
- the National Debtline – 0808 808 4000
- the Consumer Credit Counselling Service – 0800 138 111
- your local Citizens Advice Bureau – find details in your local phone book
Useful, independent websites include:
If you’re using the budget calculator, trying out some of the suggestions above – or even if you want to share your own money-saving tips – we’d like to know how you get on! Email us at firstname.lastname@example.org. Letters chosen for publication as our star letter will win £100.
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Links to external websites are for information only. Virgin Money receives no income from them and accepts no responsibility for the website content. The information in this article is correct as at 3 October 2011.