Happy New Year! We hope it’s a better year than the last couple have been. We certainly hope that you have all managed to keep safe and you enjoyed a socially responsible New Year’s Party.
As with a lot of people we are sure that you have a new year’s resolution. A lot of people are vowing to improve their physical health, their mental health, to read more books or to eat better. As accountants, we are huge proponents of improving financial health!
One of the first, and most important, things you can do to improve your financial health is to create and stick to a budget. If you were like me; you grew up knowing nothing about financial matters or being taught nothing about budgets or balancing the books or even how to save. All examples around you knew little of financial matters and were not paragons of financial health.
If this is you; continue reading to learn about building and maintaining a budget. If you have individual questions; please email us at [email protected] and we can try to help.
What is a budget?
A personal or home budget is a financial plan that allocates income towards expenses, savings and debt repayment. In simple terms this means wages are allocated to categories of expenses, like rent, vehicles, food etc.
How to budget?
Like everything that is worth doing (and is usually the reason people don’t do it) budgeting requires effort. There are multiple steps that need completing in order to create a budget. Here There are some simple steps:
- Track your money in
- Track your money out
- Calculate if you are overspending
- Adjust as necessary
Track your money!
The foundation and bed rock of your budget will be your bank account. Create a spreadsheet and track the money leaving your bank account as well as the money into your bank account.
To start with create a line for your income – this will most likely be your salary or wages. Underneath that, list out all your fixed expenses. Fixed expenses are expenses that do not change on a month-to-month basis – things like monthly insurance costs, rent or motor vehicle leases. These would be considered ‘needs’.
Deduct your ‘needs’ expenses from your income, leaves you with your flexible net income.
Below your flexible net income, list out all of the expenses that are ‘wants’ and variable expenses. These would include things like shopping, subscriptions, household bills and maintenance etc.
This will leave you with your Net income.
From your net income, deduct any savings and this should leave you with £0.
To start with; make no judgements and just collate the information as you have spent it. If you have spent £200 in the last month on digital currency for a game on your phone, record it! If you have spent £100 on Costa Coffee, record it!
I recommend you record your actual transactions for a minimum of 6 months, but a year is better and allows for seasonal variations (like the cost of Christmas!)
Once you have done this, move onto step 2…
Goal Setting!
You now have a solid base and accumulation of data to base decisions on. Now, to decide on your targets. What are you trying to achieve? Do you want to pay down debt like a loan or credit card? Save money for retirement? Save for a mortgage or holiday? Overpay your mortgage?
The traditional advice is to pay off debt before saving money as the interest you pay on the debt is almost always higher than the interest you will receive on savings.
Analyse and adjust your money!
Now, you have a database of your financial activity and a goal in mind…What do we do from here? Review your expenses! Start with your ‘wants’ like TV subscriptions and eating out, using Just Eat etc. For each line item, calculate the % of your income you’re spending on it. To do this divide the expense by your income and times by 100. As an example, if you spend £150 per month on Costa Coffee from an income of £1000 per month you can calculate the percentage like so:
(150/1000) * 100 = 15%
You now need to decide if spending 15% of your income on coffee is a worthwhile spending habit. If you decide that you do not want to spend 15% but would be happy with 10% then you would keep an eye on spending during the following month and reduce as necessary.
Written by Andrew Callister