As a financial life planner I often find myself in conversations with my clients on topics such as what the right type of investment is for them, how their pensions work or how to take money out of their company in a tax efficient way. All of these conversations are important and worth having but the effect that a good investment portfolio or tax strategy can have on our lives pales in comparison to having, and sticking to, a good budget. I would even go so far as to say that running a good household budget is the foundation of any successful financial plan.
Whatever you’re saving for, whether you’re putting money into a pension for a fruitful retirement or putting some cash away for the next family holiday, how much you’re able to save will usually make a far greater difference than the interest rate on your savings or whether you’ve chosen the best investments for your pension. Creating a budget lets you see where you are spending your money, which in turn lets you decide where you want to spend less so that you can save more.
Before you start tracking your income and expenditure to make sure you stay on track with your budget, you first need to create one!
1. List all of the sources of income you can reliably count on.
This might include salary, rental income, pension income, child benefit or anything else that is fixed and which you can expect on a regular basis without much variance. If you are self-employed or paid a variable salary use an average figure or an estimate of your income in a particular month if it is likely to be quite different from the average.
2. Record everything that you spend.
Perhaps look at the last three months of bank statements and take an average. When recording your expenditure I suggest grouping into categories that will make it easier for you to see what sort of things you are spending your money on and also for you to set a budget against particular categories rather than for individual items of expenditure; for example, you might use a heading of ‘food’ for all of your monthly food expenses and ‘TV’ to group Netflix, Disney+ and cable TV subscriptions. From here, separate the categories you’ve made into two the two broad categories of essential expenditure and discretionary expenditure. Making the distinction between essential and discretionary spends will help give you visibility of the things that you can cut down on create more surplus cash.
Now you have all the information you need to start taking control of your finances. You can see whether you spend more than you earn, where that money is going.
3. Create a budget that suits your goals.
Do you want to hit those savings goals sooner or pay off that debt a bit faster? Well, decide how much more each month you would like to save then which of your expense categories you’re going to try and spend less each month in to free up that money.
4. Track your household budget.
I would recommend using some form of spreadsheet. This needn’t be anything too complex, just something that you can easily track how much your spending against how much you’ve planned to spend. You can make one yourself or if you would rather, let us know and we will send you a template to use. There are many apps and account tools which will do it for you, but we have found there really is no substitute for logging it yourself – it’s a conscience check if nothing else “did I really spend £50 on take-away coffees last month, yet I can’t afford to protect my income, or save for my retirement?”
5. Decide on new priorities.
Once you know where the money goes each month, you can then decide how you really would like to spend it. What are all the things you keep putting off, or maybe, what now seems to be a waste of money (or needless spending). If you really want something, what are you prepared to sacrifice to achieve it?
It’s all about taking control of your finances, and spending intentionally.
– Tom Desborough