Write a budget
Millions of people regularly spend £123 more than they can afford each month because they fail to keep a budget, research by PayPal reveals.
Never letting your outgoings exceed you incomings is a cardinal element of basic financial planning, yet every month millions of people overspend and leave themselves reliant on credit cards and other forms of borrowing.
Writing a budget sounds boring to a lot of people, but it is a useful and relatively easy way to ensure you don’t overspend. A budget can also help identify problem areas in your finances and can potentially allow you to make some serious savings.
The UK’s inaugural Financial Planning Week, running for five days from 8 September 2008, highlights the importance of writing a budget.
Nick Cann, chief executive of the Institute of Financial Planning, the organisation behind the week, says not enough people in the UK are taking the time to think seriously about their finances, leaving them at risk during the current economic downturn.
“Our research suggests 28% of people do not have a budget, which is worrying as this is the best way to know exactly whether you can afford that holiday or new car. It can also reveal whether you could afford to pay into a pension, savings plan or other investment.”
So, set aside an hour this week, equip yourself with a few monthly bank statements and a couple of marker pens and write yourself a budget.
1. Why budget?
According to the Institute of Financial Planning, writing a budget reduces stress, enables you to monitor and plan your spending, and get in control of your finances. You can also cut back on unnecessary spending, thus saving money, and use your money to achieve your goals in life.
2. Getting started: essential spending
Using payslips or other relevant documents, work out exactly how much money you have coming in each month.
Now, work out your outgoings. Using your bank statement, write a list of all your regular, fixed commitments.
This can include mortgage or rent payments, council tax, bills such as electricity and gas, and insurance payments. Remember, to take some time to think about every fixed payment that has to be made. If you aren’t sure, ask yourself – could I live without this? Would I be in trouble if I didn’t pay this?
Remember, also, to take into account irregular costs. For example, if you pay your home and contents insurance annually, then divide the amount by 12 so the total cost is spread across the whole year. Do this for all annual or irregular costs.
Now, subtract your essential spending figure from your monthly income. For example, if your take home pay after tax is £1,600 a month and your fixed expenses amount to £800, then you’ll have £800 to spend throughout the month.
3. Spare cash?
Of course, that £800 isn’t going spare; you will still need it for necessary but non-fixed spending such as food, petrol, socialising and leisure etc. However, the trick is to make the money go as far as possible, so you don’t overspend and potentially save money.
Using bank statements from several different months, work out exactly where your money goes. Firstly, think about things you could cut back, like your monthly mobile phone bill or your bar tab.
Secondly, think about spending you could cut out altogether. For example, do you really need that gym membership or that morning coffee?
4. Cash happy
One thing that can throw this budgeting method is cash withdrawals – all those £10 and £20 withdrawals could have been spent on frivolous items but they could have equally been used for your supermarket shop or to fill up the car.
It is therefore spending a week or more keeping track of your daily spending habits. Remember, write down exactly what money you are withdrawing from your bank account and how you spend it, as well as payments made on debit, credit or store cards.
This method highlights exactly how easy it is to waste £10. You may spend a couple of pounds on a magazine, a few more on a snack and bottle of water, and yet more on a spontaneous but non-essential purchase.
Individually, they may not seem expensive but on a daily basis they can quickly add up.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.