You wouldn’t plan a road trip without mapping where you want to go – and you should think the same when it comes to your finances. Whether you are looking to save for a goal such as a new jacket, holiday or a home or whether it is to get in control of your finances and put you in a better financial place - take control!
If you are worrying about your finances by avoiding this topic of conversation, or even don’t like looking into your financial situation, our advice to you is that once you take a look and make a plan, it can be less daunting than it seemed in the beginning. Afterwards you may even think to yourself “why have I been putting this off for so long?” If you need that kick start in keeping your finances under control, then these 6 steps could help you out.
Step 1: Where does your money go?
A question which may get you thinking - as sometimes money just seems to vanish and unfortunately money doesn’t grow on trees!
Open up your online banking (or bank statement) and look at what and where you are spending. Take note of the amount and categorise these, for example, groceries, entertainment, clothes, bills and so on. Calculate any money which is owed/any debts and combine this amount with your expenditure (where your money is being spent). Even though you may see several outgoings in your bank account and know where these are from, always make sure you take appropriate measures at all times to ensure the safety of your debit or credit card.
Sometimes when you’re not monitoring your finances you can be fairly shocked to see where your money is actually going. So get organised and evaluate. For more ways you can keep an eye on your finances, read our 7 tips for how to be financially savvy >
Step 2: Set a goal
You can plan a trip without a destination, but it might end up with a series of twists and turns and take you somewhere you don’t necessarily want to go. The same thing goes for your finances. You can set a budget and try to save money, but the first step is to set goals. This could mean either savings goals or debt repayment goals. Make sure to attach timelines to your goals in order to help steer your budget. Start small, this could be spend £50 less on groceries a month, or put £30 each month into savings.
Your goal doesn’t have to be to save, but if it is about spending less, the saving will follow.
Step 3: Find a tool that helps you keep to your budget
There is no right or wrong way to design the look and feel of your budget – but make it work for you. Make sure it is easy to read and change information, so that you are happy to review the information regularly. I love a spreadsheet, but not everyone does. Excel documents and charts don’t have to be complicated. And there are a number of apps that you can download and use these days - so find one that works for you.
Step 4: The actual creating of a budget
Where to start? Simple, with your income (or the households income). This can get a bit tricky if your work is commission based or your working hours differ. However, you could base this on an average over the last few months, or if you have a basic pay use this and add a little more (for your commission), this way any extra commission made that month will always be a bonus – and the same goes with flexible working hours.
Now that you have the amount of money coming in, you need to take away the money going out. Start with your fixed costs, so what you pay every month, which is usually the same cost – this is your bills, so rent/mortgage, utility bills, mobile phone, internet, Netflix and so on.
Then you need to take away your variable costs such as groceries, entertainment (eating out, cinema etc.), petrol/transport and more. Base this on an average which you have spent over the last few months.
Compare the total amount that is leaving your bank account against the money coming in. Is there any area where you think, “I am spending a lot of money going to the cinema” or “I am paying too much for this bill”. Then cut this cost down and do this for your groceries too.
Depending on your financial situation setting a budget doesn’t have to be restrictive, but just helps you to monitor your spend and then you are able to come up with an amount you are happy to spend each month. Give yourself an entertainment budget – how much you are happy to spend a month on socialising or eating out and so on.
Remember your commitments change throughout the year, and some months you may have more birthdays and celebrations than others – so when you can save on some months it’s good to do so.
You may also find making a few other small changes will help bring your expenditure down. For example:
- Do you have a lot of food waste? In the UK we are throwing away £10 billion worth of food a year, which equates to £470 per household.
- Do you eat out too much with friends? Instead, why not have dinner parties and take it in turn, this will cut the cost for everyone.
- Do you spend too much on keeping the children entertained? Instead of going to the cinema why not enjoy a day down the park, or go to a museum where there are no admittance costs. Or even make a cinema night at home; check out our article on affordable activities.
- Can you cut costs by doing an activity for free? For example, your gym membership, if this is a high expense for you? Why not do your gym activities for free – go for a run outside or watch YouTube yoga or fitness videos.
But remember; allow the odd affordable treat here and there.
Step 5: Track your progress
You’ve taken the time to set your budget, so make sure you spend time to review it – see how you are getting on and ensure you are on track. Here is when you look at whether you need to change some of your budgets – you may be saving more money in some areas and actually put an unrealistic budget for others. Understanding your spending habits empowers you to reach your goals quickly and more effectively.
Step 6: Start saving
When you’re ready to do so, start saving. They always say have three months’ worth of your pay check in the bank for emergencies. Now I’m not saying this is easy, but when you actually start saving and have built up a little pot of money it is easier and more motivating to keep on going. Then once you’re in the swing of it, start saving for goals; house, new kitchen, holiday and so on. Saving for a child too? Discover the costs of some of their biggest milestones >
The Money Advice Service has a savings calculator that can help you work out how much you should be saving every month. Setting up a regular payment from your bank is advised, as it is easy and it means you do not physically have to move money around every month.
It’s good to invest in yours and your financial future, to avoid having money worries. So when you’re ready to start saving, why not check out our ISA where you can start saving from as little as £20.
Talk to the experts
The NHS have provide some information for coping with money worries, the Citizens Advice can be contacted online and provide information about benefits, how to deal with debt and can help if you are at risk of losing your home. And The Money Advice Service provide a number of tools and provide free confidential help if you are worried about debt. They also have an online a financial health checker tool it’s a straightforward process which takes between five and ten minutes and is confidential. Once the process is complete, you will be given unbiased advice tailored to your needs and clear goals you can work towards.
The action plan produced by the Money Advice Service will be broken down into the steps that you need to take to protect both yourself and your family. If your situation changes at any time, you can go back and change your answers and the advice will be changed to reflect this.
If you review your finances on a regular basis and monitor your spend you will always know the situation you are in and be able to avoid those unexpected surprises.
Creating a budget doesn’t mean you are restricted to what you spend, it gives you the opportunity for your dreams (holidays, being debt free, purchasing a home) to be achieved. Get started and take control of your finances.