We will often hear people say that we should set a budget so that we can afford the things that we need. This might be so that we can pay off a loan more easily, build up our savings or just make sure that you can cover all of your bills each month. However, there is more to setting a budget than some people think and it is important to make sure that you set one up that will work for you.
Decide on Goals
It is important to start with thinking why you are setting up this budget and what your goals are with regards to the budget. This will not only help you to set the budget up so that it fits in with this but it should also help to motivate you. It can even be good to write down these goals so that you can see them. Put them in a prominent place where you look at it each day, perhaps on a bathroom mirror or the door of the fridge so that you do not fee like the hard work seems pointless. Knowing why will help to spur you on each day, especially if you are feeling that you are not progressing well or that you are feeling deprived as a result.
Check out Current Situation
You then need to be aware of how your current finances are looking. You need to note down what sources of income you have such as salaries, income from shares, interest on savings, benefits and any other income that you get. Note down whether these are always the same and whether they are regular payments and this should allow to get an idea of the average amount of money that you have in each month. You also need to do the same with the money that you pay out. Some months will be dearer than others and averaging out across a year can give a general impression, but you do have to be careful with averaging as if one month is significantly dearer than it will be hard to manage if you have the same budget for every month.
Separate Luxuries from Essentials
It is also important to split up your payments out into luxuries and essentials. Firstly, look at all of the things that you have to pay for. This will include rent or mortgage, utility bills, loan repayments, insurance, contracts, fuel/transport to work, food and things like this. Luxuries will include things like holidays, entertainment, eating out and things that we do not need. It can be hard to put some items into one box or another, but it is wise to do so. Try to think about how much you need the things that you buy and whether you could go without them and this could help you to categorise it.
Once you have done this you are in a position to start thinking about how to assign your budget. You will need to start by making sure that all of your essentials are covered. Take this amount away form your earnings and see what is left. Then you can allocate what is left to different things. This is where you need to think about why you are budgeting. If you want to repay a loan, then you can use what is left towards this. If you want to save more you can put it into savings or whatever. However, it is worth leaving some money for yourself to spend on some luxuries. Going without all luxuries will be really difficult to do and you may find it very hard to stick to this for very long. Therefore, it can be much better to allow yourself a small budget to treat yourself with, even if it pays for a bottle of wine, a take away meal or a new pair of jeans, it can all make things feel a little easier. If you are just working on making ends meet, then you could potentially spend all the remaining budget on luxuries. However, it could be wise to put some into a savings account, even if it is just a little bit. This will allow you to be able to have some money to fall back on if you get an expensive month or an unexpected expense of some sort.
Every so often, perhaps yearly, it is important to review your budget. Prices will have gone up and so you may need to rethink things. If your income also goes up then you will have more money to allocate and you will need to decide where you are going to allocate it. You may decide you want a few more luxuries or that you want to save more or pay more off a loan if you have higher income. If prices have gone up then you may have to reduce your luxuries budget or cut back in other way.