Budgeting is arguably the foundation of all financial management. Understanding how to budget effectively can therefore help your finances significantly. With that in mind, here, accountants in Nottingham, Rogers Spencer share their tips on how to manage your finances through budgeting.
Establish a clear baseline
You need to know both your income and your essential outgoings. If you have variable income and/or variable outgoings then you need a reasonable estimate of what they will be over the year. You can often get this by checking your bank statements. Failing that, you can ask your employer and/or service provider(s) for estimates based on their experience.
For the purposes of this exercise, the term “essential outgoings” includes both key expenditures (such as utilities) and any contracts you’re locked into. These contracts may or may not be essential. It is, however, essential to keep making the payments until you can legally exit the contract.
Analyse your outgoings
Start by breaking down your regular outgoings into broad categories such as:
- Utilities and essential groceries
- Child support
- Car loans
- Essential travel costs
All non-essential spending:
- Debts and savings
- Debt repayments
- Saving and investing
- Having fun
Then look for occasional purchases and list them under the relevant category. Your bank statements may help here. You can also think about your key possessions and ask yourself how long they’re likely to last. Ideally, you should have enough money saved to replace them when they run out without having to use credit.
Hopefully, you will be able to meet all of these outgoings with a little money left over. If not, then you need to see if you can either increase your income or make savings so that you can. If you really can’t see a way to make ends meet, then you should make it a priority to get proper financial advice. Some charities can provide this for free.
Work out how much of your income is going to each category
As a first step, you can work out how much of your income goes into the three main categories. After this, however, it’s advisable to go into more detail and look at how much of your income goes into each of the key sub-categories. This will highlight your main areas of spending. These are often the areas you should prioritise for potential improvements.
One common rule of thumb is called “the 50/30/20 rule”. According to this rule, you should spend 50% of your income on essentials, 30% on wants and 20% on debt repayments, savings and investments. This can be a useful guideline but it often needs to be fine-tuned to suit individual situations.
For example, if you want to buy a house then you may need to commit more than 20% of your income to debt repayments, savings and investments. It’s also worth noting that, ideally, you shouldn’t need to make any debt repayments except mortgages and perhaps a car loan. Student loans are taken as a percentage of your income anyway.
Work out where you can make improvements
Very few people get perfect budgets on their first try, especially not if they have a variable income and/or expenses. Most people need to go through their budget, work out what their priorities are, and then adjust their spending (and saving). They can consider downsizing or look for cheaper alternatives. For instance, one can use eco-friendly and cost-effective fuels to run a furnace. You can look for companies like romeosfuel.com to get heating system fuel such as heating oil as well as acquire information on other household uses of these fuels.
As a rule of thumb, if you have no (or insufficient) emergency savings, then your top priority needs to be building up a “cash cushion” for yourself. Once this is in hand, your next priority should usually be to deal with any consumer debt you have (e.g. credit cards). After this, you can focus on dividing your disposable income between saving/investing and having fun now.
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