A budget allows you to see how much money you have and how you are spending
your money, to plan what you know you need money for and be ahead of what is coming.
In order to improve your finances, follow these 4 steps that will make you take control over your financial situation.
1) Find out where and how you have spent your money last year and how much your income has been over the last year.
Print out the bank statements for the last year and get a picture of what shops you have been to over the last year and how much you have spent. You can make a budget with a few general posts and fill them inn as best as you can, and either add up month by month or add each post up and divide it on 12. Any of these will give you a rough, but pretty good idea of your spending habits. The obvious problem is that you do not get the details of what you have bought on the bank statements, then you need the receipts, and if you are anything like me, you might not have them all any more, unless I place them in a folder and use my budget, as you can see further down! So note down how much has gone out, how much is coming in. Remember to include savings, and though they are still yours, consider them an expense.
It is sometimes a bit of an unpleasant eye-opener to go through your bank statements, but essential as you need to get a full picture of your sources of all income and outgoings you have.
You might find a budget in your internet bank showing your income and outgoings, but they tend not to be very detailed.
If you have any loans, check how much you owe and how much you are paying in interest a year. Do not just assume, find out for sure.
If you have any bill you have not opened, this is definitely the time to open them and pay. If you cannot pay, contact the people you owe money and try and make an arrangement. Do not stick your head in the sand and try to forget about bills, bills have a sad tendency to not go away. But whatever you do, do not put anything on a new credit card! There are too many people who have done just that, and later found out how terribly expensive it is. If you are short of money, try to sell some of your valuables or try to make an arrangement with the creditors.
When you go through your bank statements, you might be surprised by how many small things add up. Look for standing orders that have not been canceled, you might be surprised; one lady found she was paying for a subscription for plaster; she bought plaster for £10 a month. Look at the sums, and plan what expenses you can and want to cut.
Though it is easy to cry over spilt milk when you do this exercise, there is no point in crying! I want to cry and scream when I think about my financial mistakes, some of them have been so stupid that I wonder how I could have managed to be so careless, but there is no point, is there? I am better shaking it off and dealing with the facts, and make the best out of the financial position I am now! It might be hard to face bigger mistakes, but it is a lot better in the long run to face reality rather than hiding from the truth. Interest are running wild on credit cards, most loans have an interest and by facing how much you owe, you stand a better chance of paying it off as it will hopefully give you motivation to save and work a bit extra. It might not be very pleasant but it will not get better with time!
Find out what bills are being paid fortnightly, monthly and quarterly. And convert it to monthly if that is how you want to budget, personally I find that the easiest. If it is fortnightly, time it with 2, if it is quarterly, divide it on 3 to get the monthly expense.
So go through you bank statements, and take on board what the numbers show! Remember to be honest with yourself, though you might not like it muchJ
2) Decide what you need to spend money on, and what extra luxuries you think it is worth spending money on, if you are in a position to do so.
Look at what you have spent. Did you need to spend what you spent last year and do you want to spend the same this year? Are you pleased with all your choices, can you even recall them? Are there ways you can reduce your outgoings? You obviously need a certain amount for living, you need a place to stay, food, money for utilities, and then there are things you want to have if possible, that can be a car or two, holidays, subscriptions… See where you can cut and trim your expenses. Do you really need all those TV-channels, or can you change your packet? Can you switch your insurance for a cheaper one that is just as good? This exercise is to make you aware of what you need and want, and make you have a think about how much you want them, and if you think you can afford them. It is good to make a list over what you are changing, just to keep track of what you are doing.
3) Make this a realistic budget.
Make a budget and fill in the numbers you expect to spend, based on the knowledge of what you spent last year every month and the sums from post 2, what you have decided is needed. Make this a realistic budget. It is no point fooling yourself, remember to note down all the posts. Remember birthdays and other celebrations. You will able to find some guidelines for expected expenses for your country, but it is very much about what you have as an income and your financial position that determines what is possible, sometimes these guideline sums are simply too high for your budget.
No matter how little or much money you have, making a budget will help prevent you from spending your money carelessly.
So how do you make a budget that is right? What post will you need? You can go online and find a variety of programs, some better than others. There are some you have to pay for, others you can get for free, like Microsoft excel. I think you will get a long way with putting together your own spreadsheet, with posts that is relevant for you, and you can make it as detailed as you want it.
I like having two budgets, one that is very detailed, dividing for example my car costs into fuel, insurance road tax etc., and one budget where that cost is summed up. The same goes for incomes, one detailed and one that has it all summed up. Personally I like printing out my budget and filing them in my nice folder, I find that the easiest way to see the development.
So in the beginning of the month, you fill in the expected sums in the general budget, then you use your more detailed one and fill in your expenses, and at the end of the month, you add up in the detailed budget and fill in the actual sums in the general budget and find the difference. You might find that your calculations of what you are likely to spend are pretty accurate, or you might find that you learn a lot about your lifestyle as the months go! Your budgets will probably be better after a few months! If you find that you are going in minus, reconsider your spending, or get an extra income! It is all very well to save, but you should also look at the possibilities for making some extra money. Do not take any credit in order to get through the month, you should really try cutting some other expenses, getting another source of income, or contact the people you owe money and try to get an extension instead. Whatever you do, do not bury your head in the sand thinking the problems will go away by ignoring them.
Having a detailed budget will help you being able to cut costs as you get better control of where you money are going, and the more general one will help you with the big picture. I firmly believe there should be a post for emergency expenses on your budget, this will be needed at some point, and it will also avoid using any credit cards, as you hopefully have enough money in your emergency account for that emergency! You will at some point need your emergency account, and putting even a little money aside every month for this will help! Remember that emergency account is not meant for emergencies like “I need a holiday”, it is meant for actual necessary unexpected expenses that you cannot find the money for.
When you make your budget, you should make it your priority to pay off all debt, and start with the debt with the highest interest first. After you have paid off high interest debt, you should find yourself another target, it is always easier to keep saving if you have a goal you want to get to.
As with anything you are saving for, it being paying off debt or saving up for a holiday, make a plan and fill in how much you have as you go along. It helps your motivation when you can visualize how you are getting on.
And as someone said: Not everyone thinks it is fun to save, but I am still to hear about someone saying they have regretted saving.
4) Make new habits and stick to them.
In order to change your spending habits, you should try to change your way of thinking. Take responsibility for your own life, your own finances and make the right choices. Even when it feels hard making what you know is the right financial choice, and you really, really want to forget about being sensible, you will be thankful you did stick to your budget..
You should not allow yourself to consider it boring to secure your own future, it is simply responsible! You will find advertisers telling you to live in the moment, take out a loan for a holiday or store card to get what you want now, and pay later.. Telling you to live a bit…
Most people find they pay a lot more that way than paying cash! So dare to think for yourself and make sensible choices, choices that are good for you, not for anyone else! It is your life and it is up to you to make the best life for you and your family. You can still have a really nice life, but at a lower cost that will allow you to get through the month with enough money, and hopefully allowing you to put some money aside.
Try to get into the mindset that saving money is a game, a game that you do not want to lose. See if you can save more in March than February. Work with your competitive gene, but do not fall into the trap of comparing yourselves and your finances with those around you, try to be happy with what you have. You are in for a hard time if you always compare yourself to others, let the game be between you and your bank account!
Hopefully your budget is on the plus side at the end of the month, or at least even. Should you have any extra money, place whatever extra money you might have at the end of the month into saving or paying off some other debt. Do not start feeling flash and waste it just because you have not earmarked those money yet.
There are always new ways of saving money, and your fiances will change. Like when you have paid off one loan and you have freed up some money in your budget, use them for something sensible, do not waste them. Whatever extra money you manage to save is a bonus, so look for opportunities to save money! You should also consider if you can increase your income.
By being positive and happy despite refusing yourself things you might have associated with happiness in the past, you will be able to find enjoyment in other things that come at a lower price!
Read the posts I have for different ways of improving your income and cutting your expenses, it will hopefully give you some good ideas and inspiration to achieve your goals!