Budget is a word that you will often hear being used, the assumption being that everyone knows what it is and how to do it. It may be you think of a budget in negative terms – you associate the word with the Chancellor’s Budget, when duty on cigarettes, alcohol and fuel always seems to be increased! You know that businesses use budgeting principles to forecast their future financial position. You may be aware that having a budget for your personal finances is a good thing, but never have been shown why this is. More importantly, you may never have been shown how to actually prepare one for yourself.
A budget is basically a road map for your finances. It shows what is coming in – and where from. It shows what is going out – and where to. But most importantly of all, it shows when. Once you have this information, it allows you to manage your money most effectively, not only taking into account the amount of money but crucially, the timescale involved. Remember many people have an adequate income, but are caught out by the complexities of timing their spending properly.
There are two basic steps to budgeting. Firstly, to make a plan and put it in writing. Secondly, to follow the plan. Does that sound simple? It is! But the principles have to be learnt.
1. The best way to budget is to keep a notebook with you and write down everything you spend in it. That coffee and sandwich you buy every day on the way to work could add up to £100 a month!
2. Get as many categories as you can - you want to know where your money is going so the smaller the miscellaneous figure is the better.
3. Don’t impulse spend - it will blow your budget to shreds. If you eat five Mars bars a day put it in your budget.
4. Involve your children. Sit down and show them how much things cost - allocate a small part of the budget to them as an allowance. Maybe bring home what you earn in a month in cash [they will think you have won the lottery!] and then allocate it to tax, rent food etc. It soon rapidly disappears!
5. Make sure you don’t forget things like an annual insurance policy or subscription.
6. Decide how you are going to budget. If you get paid monthly budget monthly.
7. Remember to put money aside for annual payments, holidays, Christmas etc. For example if you decide over the year that you are going to spend £600 on Christmas presents you need to be putting £50 a month away for that.
The good news is that if you don’t have one, it’s never too late (or complicated) to create your own budget. The time spent doing so will repay itself many times over. But while it is possible to create a budget at any stage of life, there is no doubt that it is better to learn the principles as a child, gradually putting them into practice as you get older.
