Make 2011 the year you stick to your budget
Wednesday, 12 January 2011 12:00
by Ben Salisbury
If you want to make 2011 the year you stick to your budget then it pays to take a revision course in how to budget before January's good intentions evaporate.
If you are looking to budget for the first time or are frustrated that your good intentions never seem to materialise into healthier finances, there are three key rules to follow that will increase your chances of success.
Firstly, don't be too frugal. In January, you may feel it is a good idea to deny yourself treats and luxuries that you enjoy. But we all need some comforts, so think about limiting them, rather than stopping them altogether.
Be realistic. If you are unsure of the monthly cost of a particular outgoing be prudent and estimate slightly higher than you anticipate - only slightly higher though, or your budget will become inaccurate.
Similarly, if your income fluctuates, make a cautious estimate based on last years figures and the latest information based on your best knowledge. Again, if you are not sure of the exact amount of a source of income make a prudent estimate.
Finally, and this is the most difficult part, do your very best to stick to the budget. This is why the first two rules are so important, because being realistic and accurate about your costs will prevent a budget from entering the realms of fantasy or wishful thinking.
Creating a budget
It is best to create a monthly budget, but if you get paid weekly you may consider that a weekly budget works better. Most people pay mortgage or rent and other bills on a monthly basis and the majority receive their salaries monthly, but create a budget that suits you.
Creating a budget for the first time can be daunting. Begin by accessing your online accounts or laying out your bank and credit card statements, cheque book and other transaction records.
Calculate your monthly income
Make a list of all income received into your bank account or as cash. Include your salary, pension, benefits, dividend payments and any other type of income you receive regularly. If you know you will receive the occasional one-off payment, divide the total you will receive in one year by 12 and add it to your monthly income total.
Be careful to only include income that you are sure you will receive. If you have more than one income coming into the household and you want to create a family budget rather than a personal budget, include both incomes and both sets of outgoings.
Calculate your monthly expenses
It is best to put your outgoings into specific categories when you calculate your monthly expenses. Typically you will have a monthly amount for regular payments such as your mortgage or rent, council tax, gas & electricity and other regular bills. Any other expenses that are relevant to you such as gym membership, cable TV, payments into a savings account or pension, online or magazine subscriptions or credit card payments should be included too.
Don't forget to add another heading for personal expenses. These will be specific to your lifestyle but may include sports subscriptions, hairdressing, clothes, parking fees or any other minor expenses. I usually throw in an extra £50 a month for incidental expenses. For the budget to work, you need to include all money that you spend, otherwise when you come to review it at the end of each month and realise that you have spent more than budgeted despite following it to the letter, you'll be demoralised.
For all of these categories put in a budget value based on either the fixed cost of items like rent and bills or your target expenditure for shopping and personal expenditure.
It is a good idea to write down everything you spend for two months to get a really accurate handle on your exact monthly costs. You may be surprised at what goes into that 'incidental expenses' category mentioned earlier.
With that in mind, don't forget bills that come annually or twice a year such as car insurance, tax, MOT, breakdown cover and servicing, home insurance and water bills. You can work out the annual charge and divide it by 12 to add to a monthly budget. If you can avoid it, try not to pay for insurance monthly as it typically adds about ten per cent to your bill.
Reviewing your monthly budget
After the first month use your bank statements receipts and other transaction records to complete a spreadsheet or table and put in all of the costs for the month in the relevant categories. Once you have completed this task take a look at the categories in which you have spent above budget and analyse how you can reduce these costs.
Review each category and see if there is anyway that you can reduce the amount spent. Ask yourself if you really need to spend on particular items or whether you could cut them out or reduce them. You need to continue this exercise until your income exceeds or equals your budget. At the end of the following month, conduct another review and see how close you have come to living within your budget. If you have any money left, it could be time to give yourself a well-deserved treat!
Budgeting tips
Take out an amount each week for cash expenditure and don't take any more out until the next week. When it is gone, it is gone. This method is sometimes known as the envelope budgeting technique. This will help you physically see where you are spending money.
Set up direct debits for your bill payments. You can often receive a discount for paying by this method.
Cut up your credit cards and store cards and pay them off as soon as possible. If you are paying interest on any debt then try and apply for a zero per cent balance transfer credit card. Always pay off the debts that attract the highest rate of interest first.
Don't buy anything on impulse. Wait for a day and ask yourself then whether you really need it. If a regular walk to work takes you past lots of tempting shops, try and find a new route.
Plan your meals each week and write a shopping list based on what you need. When you are in the supermarket stick to the list and try and buy supermarket own brands.
Check for alternatives to buying something. See if you can borrow, hire, make or use a second-hand alternative.
Plan purchases ahead of time. This will enable you to budget and also compare and search to find the best deal.
Use a cash-back credit card if you are certain that you can repay the money on large purchases before interest kicks in.
Consider changing your current mortgage deal but watch out for any penalty fees. Take a look at your utility bills and switch if you can find a cheaper deal. Also review any subscriptions and cancel them if you don't get full use of what you are paying for.
There are plenty of ways to reduce your monthly outgoings. These budgeting tips will make it much easier for you.
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