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Budgeting

Budgets are used by huge multinational corporations, businesses large and small, high street shops and charities, online businesses, sole traders and even Governments, so you could easily be led to think that they must fulfil a useful purpose.

Indeed they do, businesses and other organisations also need to operate within their means as discussed on the previous page, and creating a budget is how they do it.

Budgets are not only useful for businesses and organisations, they can also be useful for individuals and households as well.

 

Anybody looking to live within their means, and become financially independent, MUST create a budget as a starting point.

What is a budget?

Essentially a budget is just a more detailed version of the income and outgo boxes discussed in the previous chapter, whereby all sources of income and all outgoing costs and expenses are recorded for detailed viewing. This will then show you if you are living within your means or not, and most importantly, will highlight any costs that can be trimmed down or removed altogether.

Example of a basic budget     

 

In this very basic example of a budget summary, the income from an allowance and a part-time job total £150 per month, whereas the total outgo is £125. This means there is a positive £25 balance at the end of the month, which is a great result, and proves the owner of this budget, is living within their means. 

How to prepare your own budget

Readymade budget templates can easily be found on the internet, or you can make your own using Excel.

 

An example budget can be found here 

The first thing you need to know is what’s coming in, and what’s going out?

Income

The income box, or column, will look quite different for everyone and will depend on many things, such as how old you are, if you are in full-time education, or 6th form or college, have a part-time job or a full-time job, plus any other allowances or income.

First of all, make a list of any income you receive, such as:

  • Allowances or pocket money

  • Wages from a part-time or full-time job

  • Regular income from the internet or social media (e.g. eBay)

  • Interest from any savings

  • Income from any investments (trust funds or ISA’s)

Outgo

The outgo, or costs and expenses column, will also look very different depending again on what stage of life you are at.

 

Younger people don’t have the household costs to deal with yet, but they will do at some point in the future, so it’s worth being aware of them at least, even if they don’t apply just yet.

Look at your bank statements, if you have any, or alternately try and remember the main things you have bought, and the price of them during the last month. Don’t worry if you can’t remember everything from the past, you can make a much more accurate outgo list going forward, by writing down and recording everything you spend your money on, for the next month or two.

Example of outgoings

  • Housing costs, like rent or mortgage 

  • Housekeeping if you live at home

  • Utility bills

  • Council tax 

  • Car payments, fuel costs, car insurance

  • Travel

  • Lunch

  • Shopping

  • Coffee shop food & drink

  • Phone bill

  • Computer games / Apps

  • Cinema

  • Gym membership

  • Football games

  • Swimming

  • Hairdressers/nail salon

Once you have listed both your income and outgoings in the two separate columns of your budget spreadsheet, you should then be able to see if you have any money left over at the end of the month.

Fixed costs (outgoings) 

It is also worth identifying your monthly fixed costs within your budget, as this will show you how much money you have “free” each month to spend on other things or non-essentials, as they are known.

Example of a basic budget with Fixed costs

 

Using the same example as before, fixed costs (F) have been identified as the phone bill and travel costs. The difference between your income and fixed costs is what’s left for the expenses or outgo you can control.

This means, £60 of costs are fixed each month, leaving £90 available for non-fixed costs, which are usually controllable and variable costs (V).

You now have all the information you need to be able to budget effectively each month and manage your money more efficiently. In our example, a maximum of £90 is available each month to spend and stay living within your means.

I appreciate the examples above are oversimplified, and a real example would probably run over several pages of this page, but it’s just the basic principle that we need to grasp for now. A slightly more detailed example is set out here.  

Important point

It is how people use this “free cash” each month, that will determine whether you just get by in life financially, or whether you are able to use your financial skills and literacy, to become fully financially independent.

When I say “financially independent”, I mean that you don’t have to rely on a parent or carer, have a job, borrow money, or take any state benefits. You generate all the money you need for your outgoings, yourself, using your own assets. More on this exciting prospect later.

Ten tips for budgeting

  1. Track all your expenses, even the little ones can add up!

  2. Use a spending plan to keep to your budget, such as an online App.

  3. Plan your budget at the start of each month.

  4. Always remember, short term financial pain, long term gain!

  5. Review and revise your spending habits regularly.

  6. Set a realistic budget. It should be achievable, not impossible.

  7. Budget adjustments are ok. If you have allocated £100 for food in the month, and don’t spend it all, you can use some of it, for something else if needed.

  8. Don’t forget large annual expenses, like insurance or birthdays.

  9. Add a miscellaneous line to your budget, to catch missed items.

  10. Don’t panic if you miss your budget every once in a while, especially at the beginning. It can take two or three months of trial and error before it works.