A budget is a plan for how you intend to use your money. It helps you to monitor your income and expenses. This can be a daunting process, but if done the right way you will definitely reap the rewards.
Benefits of budgeting
Preparing a budget of how you intend to use your money helps you to;
- Understand your finances. When you list down the money that is coming in and the money you are spending on expenses, you are able to have a full view of how you use your money. You able to proactively plan for potential cash shortfalls by either limiting your expenses or increasing your income.
- Understand your limitations and avoid overspending. Having a budget in place gives you a view of what you can afford and this may help you to stay out of debt. If something is out of your reach that month, you can make it a savings goals and save towards it.
- Review your expenses and make savings. It is easy to have a lot of subscriptions that you don’t use especially if they are paid automatically by direct debit. Continuously monitoring and reviewing your budget can help with eliminating waste on anything you no longer need.
- Stay focused on your financial goals. If you are working towards clearing your debt or saving towards a goal, putting a budget in place helps you to see how much you can save and contribute towards your goals. This will also motivate you to continue working towards your goals.
How to create a budget
The starting point for your budget can be your actual spend from the previous months. Once you have listed these, you can then amend the numbers as desired for the following month. We have created a simple template which you can download for free from here to start the process.
A budget needs to have the following categories;
Income – This is all the money that you are earning
Savings – Money you are putting aside for the future use or for a set goal
Debt Repayments – Money you are setting aside to pay off your debts
Fixed Expenses – Essential Expenses that do not fluctuate in amount for example rent payments
Variable Expenses – Essential Expenses that fluctuate in amount due to usage for example
Non-Essential Expenses – These are expenses you spend money but do not necessarily need. They can also be classed as luxuries. This category also includes entertainment, shopping and gifts.
Methods of implementing a budget
- Cash Envelope System. The cash envelop system is when you withdraw cash and put it in an envelope for an expense. This is a great method to use if you want tight controls on spending and do not want to overspend.
- Using a bank account. You can use a bank account to pay all your expenses. This is also handy because you can automate your savings contributions so that you do not forget to save. This system works well if most of you expenses are paid via direct debit and if you would like to automate some of the process. To ensure you do not overspend, you can withdraw your allowance or use a separate account for you non-essential expenses.
Hope the above helps but feel free to follow us on Instagram @deep_pockets_finance for more bitesize budgeting tips.