What sort of relationship do you have with your money?
If the relationship is long distance then there’s a real danger that you will never get on top of your finances. Instead, why not beat the fear by getting organised and creating a budget to see your money situation more clearly?
Creating a budget will create a strong foundation for your finances and allow you to manage your money, control spending, save more money and stay out of debt. Let’s face it without an accurate picture of what’s coming in and going out of your bank account it’s going to be impossible to manage your finances properly.
Six steps to creating a budget
Step 1: List your income
Start by working out how much income you’re bringing in each month. To do this, add up all reliable sources of income, for example wages from a job and child support. The key word here is reliable, if you get cash from outside jobs or hobbies, but not on a regular basis, don’t include that in your budget.
Step 2: Add up your expenses
Some of your monthly expenses will be fixed for example mortgage or rent, whilst others such as utility and grocery bills may vary. Firstly list all your fixed expenses and the amount of each expense. For the variable expenses try to determine the maximum amount you plan to spend in that category, for example you might plan to spend £400 on groceries.
Use your previous bank and credit card statements to help you figure out what you typically spend each month. Reviewing your previous spending can also help you uncover categories of spending you may have missed. Of course some of your expenses don’t occur every month but accounting for these periodic expenses in your budget can make it easier to afford them. Divide yearly expenses by 12 and semi-annual expenses by six to come up with the monthly amount to account for in those categories.
Step 3: Evaluate your spending
Some fixed expenses might be able to be adjusted, for example you might be able to get a cheaper broadband deal by shopping around. Variable expenses however are typically easier to adjust. You might want to use a “wants versus needs” analysis like the one provided by the 50/30/20 budgeting rule at this point. The aim will be to reduce or eliminate spending in those “wants” to make more room for the things you “need” to spend money on.
Step 4: Calculate your Net income
Net income is what you have left over after all the bills are paid. You want this to be a positive number so you can put it toward paying off debt, savings, or other financial goals. Calculate net income by subcontracting your expenses from your monthly income and write down the number even if it’s negative.
Step 5: Adjust your expenses
If your net income is negative it means you’ve budgeted to spend more than your income. You’ll have to correct this. Otherwise, you may end up having to use your credit card, overdraft, or other forms of credit to get you through the month.
Step 6: Track your spending
Throughout the month track your actual spending against your budget. There are free budget planning tools available such as Money Dashboard: https://app.moneydashboard.com/ or the Money Advice Service Budget Planner https://www.moneyadviceservice.org.uk/en/tools/budget-planner to help you do this.