The 5 Ws And An H Of Budgeting
The Who, What, When, Where, Why And How Of Budgeting.
Who should budget?
Everyone should budget. No matter your age or income if you have money coming in, you should have a budget. Whether it’s your pocket money, a student loan or your salary, you need to budget. Budgets are the foundation of personal finance. If you don’t budget your money, you don’t have a financial foundation to build upon. Every other aspect of your personal finances stems from your budget, this is why budgeting is so important.
What is a budget?
A budget is a financial plan which forecasts your future income and expenditure and determines how to manage them in order to achieve your future goals. If your outgoings are greater than your income then you have a budget deficit. If this is your situation, you need to look at ways to increase your income and/or cut back on your spending and/or find areas where you can save money. It’s a good idea to review your outgoings and distinguish between essential and non-essential spending. It’s worth cutting back on non-essential spending until your income exceeds your expenditure. If your outgoings are less than your income then you have a surplus budget and should aim to save and invest the money you have left.
When should you budget?
You should start budgeting as soon as possible. Right now is the best time to budget. A common budgeting myth is “I’ll start budgeting when I get more money.” If you won’t budget £1000, you probably won’t budget £100’000 because, who you are with £1000 is likely to be who you’ll be with £100’000. If you don’t learn to manage your finances when you have little money, it’ll be difficult to manage your finances when you have a lot of money. In terms of the frequency of your budget, you can create a monthly, weekly or even a daily budget, it really depends on which approach you think is most helpful for you.
Where to budget?
There are numerous options when it comes to choosing where to record your budget. If you prefer the old school pen and paper method, you can use use a notebook, bullet journal or budgeting printable to record your budget. If you’re a spreadsheet lover you can use spreadsheets or google docs to create your budget. If using a pen and paper and spreadsheets aren’t your cup of tea, you can use budgeting apps or personal finance software to keep track of your budget.
Why you should budget?
Here are 11 reasons why you should budget:
To gain a clearer understanding of your financial situation.
To create a plan for how to achieve your financial goals.
To promote mindful spending.
To create a debt repayment plan.
To pay yourself first.
To keep your outgoings below your income.
To avoid debt.
To pay off debt.
To plan for major expenses.
To identify areas where you can save money.
To reduce your money worries.
To develop a savings habit.
How to budget?
Here are 7 steps to building a budget:
Write down your income.
List all of your outgoings e.g rent, council tax etc.
Agree on an amount for your household spending e.g. food shopping, toiletries, cleaning products.
Take your outgoings and household spend away from your income.
Out of the remaining money:
Agree on an amount for discretionary spending.
Agree on an amount to save.
Agree on an amount to invest.
Once your budget is set up, make sure you track your actual spending against your budget to see if your budget is realistic. If there is a large discrepancy between your actual spending and forecast spending, then it’s likely your budget is not realistic. If this is the case, adjust your budget accordingly.
Budgeting Tips
Find a budgeting buddy
If you’re someone who is motivated by having accountability, then it’s worth finding a ‘budgeting buddy’ to budget with. A budgeting buddy is similar to a gym buddy, but for budgeting, you can motivate each other to create a budget and check in with one another to see if you are on track to meeting your budget.
Use separate accounts for different purposes
One of the best budgeting tips is to keep separate accounts for different purposes. Having a separate spending account allows you to spend without wondering if you have enough money left over to cover your bills. The level of separation allows you to take control of your finances. You can set up a standing order to transfer money from your main account into your other accounts. Automating your finances eliminates drudgery, and frees up your time and energy to focus on other things.