Personal Finance

How to budget

Do you know how to budget? Strangely enough, most people are unaware of how to do so. Hopefully, this information will prove to be a useful guide.

As a consumer, you face many choices on how to manage your money. Knowing how to manage money can help you make smart choices. Your money will work harder for you. You’ll be more likely to avoid traps that can undermine your ability to attain your financial goals. You’ll be in a better position to pay off debt and build savings.

A few simple steps can make a big difference in making your money work harder for you. The first step is to create a budget:

Monthly fixed expenses:

Start with monthly fixed expenses such as regular savings, housing, groceries, utilities, and car payments. Put these continuing obligations under the heading: Fixed.

Make estimates for all money spent – regardless of how you pay: cash, cheque, credit card, debit card or automatic current account withdrawals. Use current account statements, credit card statements, receipts and other records to help you complete this estimate. Be realistic – it’s better to estimate high than low.

Monthly variable expenses:

Once you have noted all your fixed expenses, write down your expenses that vary each month such as clothing, vacations, gifts and personal spending money. Put these expenses under the heading: Variable. You might have these expenses every month, but the amount you spend could change.

Make a list of all your variable expenses by writing down every expense for a month – even small purchases. Use a small note book or other informal method to track your spending. This is very important because it’s the best way to understand your current spending behaviour. Get receipts for all purchases – especially those you make with cash. You may be surprised at how much you spend in certain areas.

List your monthly income:

Now that you have figured out your expenses, write down your monthly income after all taxes and deductions. Write this under the heading: Monthly Income. Make sure this figure reflects the total take-home pay for your household after all taxes and deductions.

Now compare expenses to income:

One of the advantages of doing a comparison of expenses to income is that it provides a quick reality check. If you are spending more than you’re bringing home every month in income, you have a deficit. If you’re spending less than you’re bringing home, you have a surplus.

About the author
John Mussi is the founder of Direct Online Loans who help UK homeowners find the best available loans via the website.