Unless you control your money, making more won’t help. You’ll just have bigger payments.
Welcome back to the Money Monday Series. If you have been following along, well done for sticking with the process. If you’d like to catch up, please see my previous posts to get started.
Hopefully you’ve gone through the Eliminating Waste exercise and came out with some unexpectedly good results! Today, we will be looking at the B word – yes, the budget. I can imagine that images of a tight fist and frugal living are invading your mind when you think of a budget. I like to think of it as a spending and saving plan. A tool that helps me to tell my money where it should go and for what purpose. I see my money as my personal little army of soldiers who will focus on the mission I give them to complete.
When putting your budget together, it is important that your figures are as accurate as possible as this will give you a clear view of the current state of your finances:
1. Income – this category shows all your current earnings. Your income could come from various sources, depending on your stage in life. For some, it is pocket money, for others its from paid employment or self employment, yet for others it is from pension payments, dividends, renting a room in their house, or a combination of some of these. Make sure you list all your sources of income.
2. Savings and pension payments – these are both short and long term in duration e.g buying a car, your wedding fund, cash deposit to purchase a property, emergency fund (at least 3 months of current living expenses plus other emergencies), children’s education, holiday of a lifetime, pensions etc… A good rule of thumb to follow here is for your savings to be at least 20% of your income.
3. Expenses – Expenses are a huge category which can be broken down into a number of sub-categories:
- Housing/Accommodation – this includes rent/mortgage, buildings and/or contents insurance and any other insurance attached to your mortgage. Accommodation costs should ideally be fixed, depending on the type of arrangement you have. For mortgages, your particular mortgage deal may determine whether your monthly payments are fixed or not.
- Utilities – these are must-haves like gas, electricity, water, council tax, TV licence etc. These would ideally be fixed costs and are unlikely to change, unless you have either come off a discounted deal or the provider increases their prices.
- Food and other household items – this category is for the the monthly house shop – groceries, cleaning products etc
- Travel – fuel (petrol/diesel), rail/bus tickets and parking fees fit into this category. Also include associated expenses such as car insurance, road tax, MOT and other car maintenance costs.
- Debt Repayments – this includes car loans, credit card and/or store card payments, personal loan payments, student loans, hire purchase payments etc. Only include debts for items that depreciate in value. Mortgage repayments, either for your own home or buy-to-let investments or money you are paying towards other investments should not be included in this category.
- Health and Dental Care – typical items here are private health insurance, life insurance, dental care and optical bills (prescription glasses or contacts). NOTE: If you live in the UK and you use the NHS, most medical care is free, except for dental costs and prescriptions (if you pay for these) so its worth factoring these into your budget.
- Entertainment and Leisure – typical items in this category could be movies/theatre, days out and holidays, travel insurance, eating out, hobbies, birthdays, etc…
- Other Expenses – items in this category will vary from person to person, and are those that do not automatically fit in the previous categories. These could be childcare costs, professional training courses and hair/beauty treatments, charity giving, pets, support for relatives, school fees, pocket money, clothes etc.
4. Investments – these slightly differ from savings and include items such as shares, funds, bonds, buy to let property, etc. Ensure that you capture the amounts you pay into these, whether this is on a regular basis or as a lump sum. In some cases, your investments could be providing you with an income, therefore you’ll need to list these in your income.
This week’s task is to put your current saving and spending plan together. Click on this link for this budget planner that will also analyse your spending. What have you learnt about your spending habits? Are you in the red? If so, do you need more income or would it be better to cut back? Are you saving at least 20% of your income? How much money is going towards debt repayments? How much are you spending on leisure and fun? Where do you need to cut back? If you have money left over, where is it going? Is there a better use for it?
Let me know how you get on. My husband and I are doing this with you.
As always, speak to a regulated financial advisor should you require more support. They are best placed to offer you the right advice for your circumstances.
See you next week xx