Setting a budget: Ten tips for getting to grips with your spending
I'm Fergus Muirhead and I'm here to answer any questions you may have about any money or consumer issues.
Please drop me a line at firstname.lastname@example.org with your questions. You can also read more on money and consumer issues on my own blog.
With incomes stagnant and prices rising almost daily, it's not surprising that many of the questions I'm being asked these days are to do with keeping control of how we spend our money, so this week I'm going to take a look at how to put together a sensible budget.
One of the most common comments that you hear people making about budgeting, and the one thing that puts people off the idea of ever doing one, is that it is about not spending money - but that is simply not true.
A budget, at its simplest level, is about knowing how you spend money.
And knowledge is power, especially when it comes to dealing with your money.
At the risk of teaching your granny to suck eggs, this is pretty basic. But I make no apologies for that, because it is often the basics that trip us up.
I was talking recently with a bunch of solicitors (if that is the collective term) and we discovered that one had three gym memberships and another spent a three-figure sum every month on coffee from a well-known coffee shop.
Now the super-fit solicitor with three gyms was well impressed that she could cancel two memberships, stay fit and have more money to spend every month, but the other, while surprised the figure was so high, was quite comfortable with his caffeine intake because he reckoned he earned enough to justify the expense.
The interesting thing here was that before I spoke to them they didn't know about the multiple gym memberships or the expensive coffee habit. If fact, they didn't know an awful lot about how they spent their money every month - and in that, they're no different from the rest of us.
So before we start to look at how to put a budget together, there is some work to do.
This is probably one of the single most important exercises you will ever carry out in connection with your money, and I'm not overstating its importance by saying that.
You need to keep an absolutely accurate note of everything you spend for a period of at least a week, but preferably a month. The coffee on the way to work in the morning, the newspaper or magazine to read on the train, the sandwich and chocolate bar at lunchtime, the gin and tonic on the way home, the DVD you rent when you get home - everything.
And be honest with yourself.
You're not doing this for me or your bank manager or your boss or your partner.
And you're not doing it because you are trying to figure out what bits you are going to have to cut out.
You are doing it because the starting point in putting together a sensible budget is to understand how you spend money.
The big stuff is easy - your mortgage and car loan and council tax all come out of your bank every month and you can quickly add them all up and work out how much they total.
It's the daily money that gets lost. And that's what you need to get a handle on before we can pull it all together in a sensible format. And remember this exercise is to help you spend, not stop you spending.
That's tip number one in putting together a helpful and accurate budget. Here are the full 10 ways to help you get a real grip on how you spend your money:
- Keep an accurate note of how much you spend for one full month. That includes newspapers and magazines, lunches, cups of coffee and drinks in the pub. Only by doing this will you be able to calculate how much your day-to-day living is costing you.
- Try to pay as many bills as you can by direct debit every month. Apart from the fact that you might get a discount for paying this way, if you arrange for bills to be dealt with as soon after your salary is paid as possible then you will know how much money you have left for the rest of the month
- Keep a spreadsheet showing your monthly income and expenditure. Spread as many bills as you can over the year so that you don't have big bulges in some months when your expenses increase dramatically. Don't forget to add in the things that you only pay once a year like your TV license or your car insurance.
- If you need to overdraw to cope with extra expenditure at a particular time remember to ask your bank first. Unauthorised overdraft rates are much higher than authorised ones and you also run the risk of having bills unpaid or direct debits returned, increasing the charges you are likely to have to pay to your bank.
- If your borrowing requirements are likely to be longer term then a personal loan might be a better option than an overdraft. Shop around before settling on the loan that offers not only the lowest interest rate but also flexible terms should you find that you are able to repay the debt earlier than you originally intended.
- Don't rush into buying something just because you want it today. A store might offer you access to a personal loan or its own store card, but you should go away and check out the price elsewhere, and whether there are better ways of funding your purchase. This is especially true of more expensive items like furniture or cars.
- If things get tight at anytime remember that you have to prioritise your debts. If you don't pay your mortgage you could lose your house, if your electricity remains unpaid you may have it cut off. If you can't afford to pay everything at one time then you need to make a list of the most important debts.
- Make sure you speak to your creditors if you are not going to pay bills. There is nothing they like less than debt being built up without being informed. It's not easy but there should be no stigma to owing money and it is really important that you are up front and honest. Go to them and tell them you have a problem, why you have it, and make a proposal to pay what you can when you can.
- Remember that if your outgoings exceed your incomings you do have a choice. Most people would look at ways to lower outgoings by trying to spend less. But you could, instead, look at ways of increasing your income, whether by looking for a better rate of interest on savings income, or asking for a salary increase or more overtime at work.
- Here's the most important tip. A budget is not all about telling you to stop spending money. It's not supposed to be negative. Just the opposite, in fact. It's all about helping you to spend more money effectively and in areas that you want to spend it, rather than wasting it on high interest charges on loans and credit cards and bank charges. Use it as a positive tool to help you control your money, rather than allowing your money to control you.