Budgeting (sadly) has a bit of an uncool reputation. If budgeting were at school in every movie we’ve ever seen, it would be the last kid you’d choose to play on your team. Left sitting alone on the bench until the teacher assigns him/her to one of the reluctant teams. But, much like those kids at school who were thought of as uncool and so often left out, it’s a shame because budgeting has a lot to offer. There’s much more it can do for you than meets the eye. And if you gave it a chance you’d love it.
Budgeting is often thought of as boring and restrictive in that it seeks to limit what you spend, which many people view as putting a stop to fun. But the opposite is actually true.
Today I want to help you feel excited about budgeting. Yes, excited. Because budgeting is an incredibly powerful tool that you can use to get what you want. It’s a way to be intentional with your money so that it’s not wasted. By doing this, you can get on and achieve your goals. So keep reading to learn more about what budgeting can do for you and how to start.
What is budgeting?
Budgeting is your plan for how you’ll spend your money. It’s usually done on a monthly basis. Though some people do it on a weekly basis. There’s not a right or wrong way here, it’s just about finding what works for you.
Budgets take into account your income and balance them with your expenses. In other words — how much money have you got coming in? And what are you planning to spend it on?
Expenses include everything that you intend to spend money on. From rent or mortgage repayments, to utility bills and council tax, food shopping, takeaways, Amazon purchases — the lot.
Creating a plan for what you will, and won’t, spend money on — helps you to be intentional with your money. And this enables you to get on and achieve your goals.
Why is it important?
Many people who are keen to start budgeting are doing so because they are living beyond their means. This means their expenses are costing them more money than they are making. And this can create problems for people as debt piles up over time.
So budgeting is a way to curb that spending to make sure that your outgoings do not exceed your income. And where needed, it also helps you make a plan to pay off any debt.
But budgeting isn’t just about living within our means and getting/staying out of debt. It’s also about achieving our goals.
Goals that involve a big purchase like buying a home, require a lump sum of money to be achieved. For example, when buying a house you’ll need to save up a deposit of at least 5% of the purchase price. For a house costing £251,500 (the UK average), that’s £12,575. Without a budget, it’s a lot harder to save that money as there’s no plan in place to guide you towards positive actions like transferring money to your savings account instead of buying all that stuff you like the look of on Asos.
Where to start
Budgeting will be easier for you to stick to if you make a realistic, achievable budget personalised according to your needs. Here’s how to start.
1. Write down what matters to you
What you spend is a reflection of what you value. It reflects your ambitions and aspirations. To help you stick to your budget, list your values (ie what you value) and prioritise them. You can then focus your mind on this while creating your budget. It will help you to make sure that what you’re planning on spending your money on is truly aligned with what you value.
2. Set your one big goal
What’s the one big goal you’re working towards this year? Whether you’re hoping to buy the house of your dreams, get a car, plan your wedding or go on holiday — a budget can help you achieve it. So having a big goal in mind helps you stay motivated as you build the habit of budgeting.
3. Work out your income
Now we get into the nitty-gritty of your budget. It’s time to work out your income. You can include any salary or wages you receive for work you do as well as any income you earn from side hustles, bonuses or overtime.
4. Work out your expenses
Next, look at how you currently spend your money. Where does it go? Look through your bank statements to see how you spent your money last month. Then organise your spending by creating categories (for bills, clothes, food, socialising, holidays etc) and assign each expense to one of these categories. This helps you see how much you’re spending on each every month. It’s also good practice to distinguish between your fixed expenses (like your rent that doesn’t change month to month) and flexible ones (like clothing which can vary from month to month).
5. Choose a budgeting method that works for you
There are lots of budgeting methods out there to choose from. The 50/20/30 formula for budgeting is very popular. It splits your spending into three categories: needs, savings and wants. This formula suggests 50% of your income is spent on living expenses and essentials (needs). 20% is spent on financial goals, like saving up for a house deposit (savings). And 30% on doing things you enjoy like shopping, socialising or going on holiday (wants). There are other types of budgeting that may suit you better though. Check out this blog for more ideas. When building your savings, consider using Loqbox which will help you boost your credit score at the same time.
6. Create your budget
Whichever budgeting technique you choose, remember that when it comes to creating your budget your needs must come before your wants. And that to stay out of debt, you need to spend less money than you make. In working out your expenses you’ll probably have noticed that you spent more on flexible costs like takeaways or clothing than you realise, and possibly more than you’d like to. This is your opportunity to cut some of that spending out. In your budget you can decide how much you will spend on each category. Make sure this is aligned with the values that you wrote down at the beginning of this exercise. Also note that if you have debts with high interest rates to pay off (like credit cards), this should be a priority over growing your savings.
7. Tweak it as you go
You may find in the first month of trying to stick to your budget that you’ve been a bit ambitious with regards to your plans to cut back on your spending. And this makes it difficult to stick to. Being realistic with your budget by giving yourself the freedom to buy what you need and enough of what you want will make it easier to stick to in the long term. Treat your budget as a work in progress and tweak it as you go to make sure it works for you. And if anything changes in your personal circumstances, like if you get a pay rise, then you’ll also want to factor that into your budget.
8. An app can make budgeting easier
If you’re new to budgeting it’s always worth going through the above process to start with so that you can better understand what’s happening with your money. And as you build your budgeting habit month after month there are some handy apps that can help. Check out this blog for a list of the top five.
Budgeting is a good money habit to build, but it can take a little while to get into the swing of it. Be patient and keep it up! In time mastering this skill can help you to achieve financial freedom.
When building your financial health, Loqbox is the easy way to grow your credit score while building your savings. You can start today by saving as little as £20 per month. Find out more here.