Budget Planning

Budgeting – sounds easy, right? So why do so many people fail at sticking to it? Financial expert Michael Barton explains why you need to invest time into honest and savvy budget planning, and how.

Have you tried budgeting and found it to be a waste of time? I’ve got news for you – you’re doing budgeting wrong.

The real problem is that no one has taught you how to budget effectively. If you’re like 90% of people who attempt to budget, you’ll only get a couple of months in before all your financial planning goes haywire.

From experience, I can safely say that even financial advisors don’t cover budgeting properly when you’re asked to fill in a fact-find.

In this article, we’re going to walk you through how to create a budget that helps you manage your money and get your financial house in order. A skill that is crucial to your short- and long-term finances.

Traditional (Bad) Budgeting v Effective Budget Planning

Let’s get straight to the crux of the problem. Traditional budgeting is designed to answer three questions:

1. Am I spending more than I earn?

Often, we only consider budgeting when we realise we are spending more than we earn. How can you tell you’re overspending?

The continually overdrawn current account, increasing credit card balance, and ever higher debts are a bit of a giveaway, aren’t they? Painful, too.

Getting into debt is a downward spiral. The longer you don’t take action, the faster you’ll slide. So we move to the second question.

2. How much can I spend?

The next part of budgeting is figuring out how much you can spend. If you’re overspending, this means some tough decisions may need to be made. You’ll need to think about where you can cut back, and what spending must be prioritised.

Sounds solid, right?

The trouble with this traditional two-question approach is that, although it purports to give you a spending limit, what you end up with is a spending target. That target is often overshot.

What this type of budgeting doesn’t do is help you plan for your financial future. Which is why I include a third question:

3. How much can I save?

This should really be the second question you ask yourself. Because you need to reset your spending limits. The best budgeters I know plan to save first before they spend any money – even on the essentials.

If you think about this, it’s an obvious way to budget. Save before you spend. The same way that the government takes tax from you before you spend. They want to make sure they get their slice of your hard-earned wages.

National Insurance is taken before you get your take-home pay, too. Utility companies love direct debits – they can take whatever they want from your account before you spend it.

Save before you spend. Pay yourself first – as soon as you receive your salary. Start your budgeting journey with this objective in mind.

The 11 Categories in an Effective Budget

The key to creating a successful budget is to be thorough. Leave nothing to guesswork. Accuracy is crucial. It’s also critical to understand where and how you are spending your money – you cannot manage what you don’t measure.

The 11 items in an effective budget detail what you are earning and spending now. This will show you where you are overspending – knowledge that is necessary to reduce your spending and regain control of your finances.

As you work through the following 11 items further down, convert each to a monthly figure. (For annual amounts, divide by 12. For weekly amounts, multiply by 52, then divide this number by 12.)

The last column in each of the following tables is there for you to place a tick if you can improve the amount in the monthly column (reducing spending and increasing income/savings or investments).

I’ve included key questions to ask yourself in each category, and a few tips on how to save money throughout. With accurate budgeting and a disciplined approach, there is no reason why you cannot cut your spending by hundreds, if not thousands of pounds each year.

A Note About ‘Other Spending’

‘Other spending’ should cover everything that isn’t specifically mentioned in any of thhe section’s spending categories.

If you buy a daily newspaper, subscribe to a magazine, make regular charity donations, and so on, add this spending into where you think it fits best. It’s essential you do not miss anything out!

1. What You Earn

This is your net earnings: the amount you receive after tax, national insurance, and pension contributions have been taken from your gross pay. Include all income in this section:

Key questions to ask

• Can you do more overtime at work?
• Have you checked that you are claiming all the benefits to which you are entitled?
• Could you start a side hustle to develop a second income stream?
• Should you take part-time work to boost your earnings?

There are many ways to increase your income. Make sure you explore them all!

2. What You Save / Want to Save

Now, complete the following section with the amounts you are saving and what you would like to save:

Key questions to ask

• Will what I am saving help me achieve my short-term and long-term financial goals?
• Have I got an emergency fund, and is it sufficient?
• Am I saving in the best accounts?

At this stage, it’s important to consider how much you should be saving. Most crucial is to ensure that you are building/maintaining an emergency fund that is readily accessible in case of financial emergencies.

(Someone once told me that if you have enough ‘ready cash’, you’ll never have another financial emergency again. He was right!)

3. Household Bills

Under this section, include all your regular bills. This includes your mortgage or rent, utilities, and so on.

Key questions to ask

• Have I got the best mortgage deal?
• Can I reduce my utility bills, either by getting a better deal or altering my usage?
• Do I really need my subscriptions, or can I get better deals?
• Should I use some of my savings to reduce my overdraft and cut my banking costs?

There are many ways to save money – find the ones that work best for you, and you’ll be well on your way to reducing your regular monthly household bills.

4. Insurances

Though some of these might be considered as part of your household bills, I prefer to separate them because these are some of the most easily reduced costs. You just need to shop around.

Key questions to ask

• Do you really need the insurance cover that you are paying for?
• Are there any insurance policies that you don’t have, but should?

Adequate insurance is critical, and more so if you are married/a parent. It’s a good idea to review your insurance cover regularly, and you should certainly shop around when each insurance is due for renewal.

It’s also worth looking at the rewards that your bank and credit card companies provide on your accounts – insurances are one of the most underutilised credit card benefits.

5. Car & Public Transport

One of the biggest areas of expense is transport. Be brutally frank with your numbers here.

Key questions to ask

• Am I overusing my car – could I walk to the local shop, for example?
• When was the last time I compared my car insurance with other providers? (I recently saved more than £100 a year by spending 15 minutes on comparison sites – and then going direct to the insurer.)
• Could I cut my commuting costs by working from home at least part-time?

Many homes have more than one car parked. Many years ago, I had a car stolen. I never replaced it. The experience taught me that, with a little compromise between my wife and I, it was possible to live with just the one car. That’s one less insurance, one less car tax, and one less car to clean. Savings of hundreds of pounds each year.

6. Eating, Drinking & Entertaining

We all need to eat and drink. We all need time out, too. Do you know how much you spend in this area each month and year?

Key questions to ask

• Is my grocery shopping bill getting out of hand?
• Do I really need to eat out so often?
• How much could I save by taking a packed lunch to work, instead of buying sandwiches from the local sandwich shop?
• Am I wasting money on any hobbies (unused gym memberships, for example)?

You really can save an incredible amount of money on your eating, drinking, and entertainment spending. Look for alternatives to the expensive brand name products you have become accustomed to.

If you like a few drinks with friends on a Friday evening, cut down by one drink. Always shop with a list, and always think, “Do I really need this?” before buying something you ‘want’.

By following a few core money-saving tips, annual savings of more than £5,000 are easily achievable.

7. Family Costs

If you’re the parent in a growing family, you’ll know just how expensive children can be. From kitting them out for school to your role as ‘Taxi of Mum or Dad’, spending on your family can quickly get out of control.

Key questions to ask

• Can time be shared more effectively to reduce childcare costs?
• Am I shopping for savings on school clothes and supplies?
• How much is my pet really costing me, and can I reduce how much I spend on pet food?

This is one of the hardest areas to reduce spending. You love your children and your pets. You want only the best for them. Continue to feel the same, but be cost aware.

8. Healthcare, Personal Care & Clothes

Health is crucial to living a good life. So is looking and feeling good. It follows then, that we tend not to scrimp when it comes to spending on healthcare, personal care and clothes.

Key questions to ask

• Is my dressing table or bathroom cabinet overloaded with products that I don’t use?
• Can I wait one extra week between haircuts?
• Do I really need so many clothes?

I’m a firm believer that health comes before money. I also know that many of us overspend on personal care and clothes in particular.

Many years ago, when I was working in the City, I participated in an eye-opening course discussing clothes and colours. The coach asked how many ties, shirts, and pairs of cufflinks I owned. I proudly stated the numbers: 106 ties; 26 shirts; 16 pairs of cufflinks.

“How many ties do you wear out of those 106?” She asked.

I thought about it. With a red face, I said, “Only about seven or eight.”

A similar story with my shirts and cufflinks.

From that moment, I vowed to buy and own fewer shirts, ties, and cufflinks, but to buy higher-quality clothes. My shirts hang better in the wardrobe and look better when I’m wearing them. I can only imagine how much money I’ve saved with this different shopping mentality.

9. Self-Development

Don’t neglect self-development. It’s the way to developing your value in the world, and when your value grows so does your earning potential.

Key questions to ask

• Am I taking the right training courses to meet my career goals?
• Are the courses I’m taking providing value for money?

There are many cost-effective courses online that could deliver the results you desire. It may also be that your current employer will pay for training. Have you asked yet?

10. Debt Repayments

I may have left this category of expense until the penultimate on the list, but this doesn’t mean it is any less important than others.

This is the single most important category to work down to zero. Why? Because every pound of debt is costing you in interest payments (or likely to in the future).

Key questions to ask

• What is the highest interest rate I pay on my debts?
• Which should I pay off first?

Usually, it is advisable that you pay off the most expensive debt first. However, there are some situations in which you might not do this; for example, if you can restructure your credit card debt with a balance transfer at 0% or a cheap money transfer deal.

Or if you have a small personal loan balance remaining and want to pay it off to make managing your debt less cumbersome.

If you are really struggling with debt, do speak with a debt counsellor sooner rather than later. We’ve included some useful contact details at the end of this article.

11. Holidays & One-Offs

Finally, we come to major spending. An area in which many people underestimate just how much they spend.

The best way to ensure you have enough money in this category is to work out a total monthly number and then put this to one side when you get paid. This creates what I call a ‘circulating fund’ – it’s like savings, but very fluid.

Key questions to ask

• Do I really need a new sofa right now?
• What holiday will create the most memorable moments?
• How much should I budget for Christmas?

The idea should be to have enough money always put aside for holidays and special occasions. This way, you won’t need to dip into your regular savings. It’s a good strategy to agree on how much you will spend on presents for birthdays and Christmas, too.

This will help you define your budget, as well as manage expectations of others (have that conversation well ahead of time!).

Tips for Budgeting Better

Before filling out your budget, I can’t stress enough the importance of being as accurate as possible. It’s a bit like heading for the North Pole. If you set out just one degree off-course, you’ll end hundreds of miles away from your desired destination.

To help you set the right course with your budget, follow these tips:

Be Conservative

Overestimate your outgoings and underestimate your income. This will build a natural buffer. To do this, round down income amounts and round up expenses.

For example, if your car insurance is £35 per month, put down £40.

Get All Your Paperwork Together

Collect all your paperwork, bank statements, and receipts before you start your budget. Ideally, you’ll have at least three months’ worth of receipts and bills to work from. Take your time and make sure you account for every penny.

Work Through Your Budget with Those Who Matter

If you’re a parent or have a partner, your budget isn’t only for you. It’s for all of you. Sit down with your partner and work through your budget together.

Being on the same page will help you account for all your spending and make certain that you are in agreement when it comes to putting your financial planning into action.

Be Accurate & Don’t Double-Count

Whatever you do, don’t underestimate your spending. If you can’t get an accurate handle on an item of spending, it’s always better to overestimate.

However, you must also make sure that you don’t double-count your expenses. If you have included house insurance in your household bills, don’t add it to your insurance costs too.

A common double-counting error is to include credit card repayments as well as spending that you have made on your credit card. If you include credit card spending on restaurant bills in the eating, drinking, and entertaining category, don’t add it to your credit card repayments.

How Are You Doing?

With all the categories filled in, it’s time to see how you’re doing. Add all your spending together and deduct it from your income. Is the result a positive or negative?

If it’s a positive, congratulations! You’re doing great, but this doesn’t mean you can sit back and relax. Being frugal about how you spend your money will help you to stay on track and do even better.

Reducing what you are spending can save thousands a year, and this will give you the financial firepower to accelerate toward your financial goals.

If your budget is in the red, it’s time to act now. Take a long, hard look at what you are spending and how. What can you do to reduce your outgoings? This is crucial to stop hurtling toward debt or to repay the debt that is holding you back.

You really want to avoid drifting into a debt spiral – it can ruin your relationships, mash your mental health, and even crash your career.

How to Climb Out of a Debt Spiral

If you find yourself falling into a debt spiral, the time to act is now. Don’t delay.

If you can take action to reduce your spending while maintaining your standard of living (like buying own-brand groceries instead of premium-brand products), get balance transfer deals on credit cards, and negotiate cheaper prices for subscriptions, getting out of debt will be painless.

If you can’t do any of these things, then you may need to take more drastic action. You’ll need to cut back on spending and forego those little luxuries that make your life more enjoyable. Even small lifestyle changes can make a big difference.

That Costa coffee you have every day on your way to work? That’s a potential saving of more than £700 in a year.

To decide how you can live more financially savvy, simply ask yourself if you need it – and if the answer is yes, ask if you could do it more cheaply. Do this in every category of your financial life.

Finally, when it comes to repaying debt, don’t be afraid to sell things you don’t use or don’t need. The cash you raise could make a big difference to you. Use the money to repay as much of your most expensive debt as possible.

The Last Word: Manage Your Spending with Jars

When everyone got paid in cash, managing money was easier. My dad would come home on a Friday, open his pay packet, and spend a few minutes dividing his earnings into jars.

One for the rent. Another for shopping. Yet another for the electric. And so on. What wasn’t allocated in any of these ‘necessary expense’ jars was available to spend.

My parents would never rob Peter to pay Paul. They would never take money from the electric jar to spend on a meal out. The jar system was how they remained financially disciplined.

Today, many banks offer a digital jar system. I use my Wise account in this way – keeping my Christmas savings separate from savings for my children and grandchildren and my emergency fund (which I drip feed into constantly). Other providers that offer multiple accounts include Chase, Monzo, and Starling Bank.

In conclusion, get your budget in order. Then review it regularly. Set aside a few hours every three months to make sure you’re on track and doing all you can to save more and spend less.

It will be the best few hours of ‘work’ you ever do – and remember, pay yourself first, by setting aside savings on pay day.

Are Your Debts Overwhelming You?

If you feel that your debts are getting on top of you, or you just can’t see a way out of the debt spiral you have found yourself in, there is help available. The following agencies have enormous experience in helping people from all walks of life get on top of their debt and turn their finances around:

• Citizens Advice Bureau
• National Debtline 
• StepChange Debt Charity 

Don’t delay getting in touch. The sooner you speak to someone who can help, the sooner you’ll be back on track.