We all know that drawing up a budget is an essential part of successful financial planning. This is because it helps us work out exactly how much we can afford to spend, save and pay towards any debts. The problem is though, that many of us don’t know where to start. Below we give you some tips on effective budgeting, as well as common financial problems and how best to deal with them.
Where do I start?
The first step in financial planning is to draw up a list of your income and expenditure, including all income coming in and all money going out. It's best to calculate this as an annual figure because monthly expenditure can fluctuate.
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Start with your bills, including rent or bond payments, gas and electricity, tax, water, phone, internet, insurance, and car expenses. Don't forget any debts or child maintenance payments.
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Then think about everyday expenses, such as food, household items, petrol, cigarettes, alcohol, entertainment, holidays, and eating out. Finally, include an estimated amount for unexpected costs, such as new furniture or car and household repairs.
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After working out your total expenses for a full year, calculate your monthly or weekly expenditure by dividing by 12 (for monthly) or 52 (for weekly).
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Next, calculate your income. This may include earnings, interest on savings or investments, benefits or tax credits, and rent from lodgers or family.
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If you’re finding it difficult to remember everything, take a look at your bank statements for details.
What if I have money left over?
If you have any money left at the end of the month, put it into a savings or investment account rather than leaving it in your bank account or spending it without even noticing it.
It’s vital for everyone to have a rainy day fund; the recommended minimum amount for this fund is three times your monthly wage or salary. You should use this in emergencies or for unexpected expenses that you wouldn’t normally have budgeted for. You may also want to save for a new car, house deposit, or other large purchases. Finally, you could choose to put any excess funds towards your pension, overpay your bond, or clear off any existing debts.
What if I’m spending too much?
If your expenses exceed your income, you need to take action immediately to avoid falling into debt. Don't be tempted to take out a credit card or personal loan to fund your lifestyle. Think carefully about how you can use financial planning to reduce your spending and boost your income.
Perhaps you can find a cheaper insurance or cell phone provider or get a better deal through your existing provider. Or perhaps you need to cut down on eating out and make more meals at home? Also, think about how you could raise additional funds. Perhaps you could get a second job or claim benefits or tax credits?
Setting up an effective budget is the first step towards successful financial planning and is vital if you want to ensure your ongoing financial security.
It’s important to keep your budget constantly updated, as income and expenditure will fluctuate over time. If you’d like some help with your financial planning and choosing the most affordable insurance products for you, contact a financial planning broker today.
