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The B Word

The all-time dreaded B-word. Budget. If you want to take control of your finances and build a comfortable life for yourself and your loved ones, you need to get comfortable with budgeting.

I feel like a lot of people are put off from budgeting because of misunderstanding what a budget actually is. Let’s first address a few misconceptions and then we’ll talk about exactly what you need to do, step by step.

Misconception #1: A budget is looking at where the money went No! A budget is not a retrospective view of where you spent your money. A good budget must be a prospective view of where your money will go. Looking at your past spending can certainly give some insight but the fundamental principle of taking control of your finances is telling your money where to go. In the world of personal finance, this is commonly known as ‘paying yourself first’. It’s about taking control and not letting bills and expenses just happen to you. It’s about knowing exactly where each £1 is going to go. This will help you in so many ways:

  • Peace of mind knowing your bills are all covered.

  • No more feeling guilty for going out with friends or buying something you want.

  • Helps you plan for the future.

  • Taking control of your life (financially).

Misconception #2: Budgets are time-consuming Setting up your budget will only take 1.5 hours maximum the first time you do it. After that, you will only need to spend around 10 minutes on it once a month.

Misconception #3: Budgeting = Deprivation This could not be further from the truth. A good budget will allow you to improve your life significantly. You’ll be able to afford a more comfortable life and spend money without ever feeling guilty. However, depending on where you start, you might have to make some short-term sacrifices. I’ll talk about this in my future post regarding debt and how to pay it off.

Budgeting Step-by-step Okay, now that we have cleared some of the more popular misconceptions, let’s get to the fun bit. All the products you’ll see below are what I use. There are alternatives, however, I’m just going to share what I found to work the best for me.

Step #1: You need to have at least 3 bank accounts. - One ‘Main Account ‘ with a mainstream, legacy bank e.g. Barclays, NatWest, HSBC etc. Make sure your salary or other incomes get paid into your mainstream bank account. - One ‘Spending Account’ with Monzo Bank. - An easy access ‘Savings Account’. (Easy access means that you can add/withdraw money at any time without penalties or delays). Get familiar with these 3 terms as they will be referred to in the following steps.

Step #2: You need to use Excel or Google Sheet to set up your budget. If you do not have access to Excel, Google Sheets is free to use. Click here for the link.

Step #3: Let’s say you got paid today and this is the first time you’re doing a budget. On Excel or Google Sheets, set up a table for your monthly income source(s). Like this:


Note: the amount you put in the table above is your net income amount. If this is the first time you are doing this then put the balance you currently have in your Main Account.

Step #4: Set up a table for your monthly fixed costs. Fixed costs are all expenses which you know will occur every month and remain constant, hence the term ‘fixed’. For example, direct debits, telephone bill, internet bill, council tax etc.

As you may have noticed, you’re going to make sure that all fixed costs and variable costs (see Step #5 below) are going to be taken out of your Main Account.

Step #5: Set up a table for your monthly variable costs. These are expenses which vary, and you may not have them every month. For example, birthdays, car MOT, road tax etc.

Step #6: Add up your fixed and variable costs.

Note: once you have your fixed and variable costs listed, it’s a good idea to analyse the costs and see if it’s possible to save some money by finding cheaper providers for bills or cancelling subscription you don’t use. This will increase the money you have leftover for the next steps.

Step #7: Set up a table for your Spending Account (Monzo). Take your Total Net Income and subtract away your Total Expenses as per the table above. This will leave you with money to allocate towards your Spending Account. Here, you may include things like groceries, eating out, miscellaneous purchases and some fun money (money you spend on whatever you like, guilt-free).

Step #8: Now you have covered your fixed costs, variable costs, and spending money. Next stage is crucial for financial success. Set up a table showing you how much money you have left, after you have done all the above steps. This is where the ‘paying yourself first’ happens. Here, you have many different options of what to do with this money depending on where you are in your financial plan journey. However, I’m firstly going to suggest that you build up an emergency fund. Remember the easy-access Savings Account from Step#1 ? That is where you are going to put all the money you have leftover.

What is an emergency fund? Why do you need it? An emergency fund is sort of self-explanatory. This is a sum of money that you are going to put away to use only in emergencies. The washing machine broke down? No problem, I can buy a new one with the emergency fund. Does the car need repair? Emergency fund to the rescue. Get the idea? Life is unpredictable and therefore an emergency fund will provide us with a peace of mind knowing that if something bad happens, it will be taken care of without getting into debt. We are planning for the future so we can focus our attention on other things and sleep comfortably at night. Now you may ask, well how big should my emergency fund be? The answer to that is, it depends. Ideally, you should have 3-6 months’ worth of expenses in your emergency fund. Can you imagine the psychological benefit of knowing that if something bad happens (financially) to you, you are covered for the next 6 months? Got fired? Got furloughed? Broke your leg? No worries. You have enough money to live for the next 6 months.

Step #9: Great, well done. Now you have given a job for each £1 you have. All you got to do now is transfer each sum to their to the respective accounts:

Once you have your emergency fund set up and you are happy with how much you have in there, you can start looking at investments. I will talk about investments in my future blog posts. For now, get comfortable with budgeting.

Remember, every month on your payday, sit down for 10 minutes and adjust your budget. Make sure you’ve accounted correctly for your fixed costs, variable costs, spending money and how much you’re going to put in savings. Then, make the transfers on your payday. That way, you are making sure that you are ‘paying yourself first’ before any bill, expense or direct debit has even come out of your accounts.

PS: this is common sense but, once you have transferred money into your emergency fund, make sure you do not touch it unless it is truly an emergency. You must build self-discipline. If you keep running out of Spending Money that means you are underestimating your spending when making the budget each month. Be realistic with yourself. Also, worth noting that if your family does not budget and you are tired of hearing them complain or argue about money then take the initiative. Have a discussion with them. Help them get their finances in order. Sit with them and make up a budget. Money should not be a taboo subject with your loved ones. With open communication, it will benefit everyone in your household.

If you have any questions, please do not hesitate to reach out. Always happy to help.

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