As we come out of the holiday season, many of us are thinking about how we can tighten the reins on our finances to budget effectively this year.

No matter how much you spend over the Christmas period we believe that setting a new budget can help you to track your spending moving forward and may help you to secure your financial goals this year.

A budget is a spending plan for a period of time, usually per month, which is based on your income and expenditures. Budgets can be seen as restrictive, but they also create a lot of freedom in knowing you have the finances to spend on the things you really want.

The biggest benefit of budgeting is that it gives you the power to save money for your future. This could be a ‘safety net’ in case of a sudden drop in income or an extra expense, or towards a specific goal, like getting a mortgage or investing to build wealth. You could even start putting away money specifically for next year’s Christmas period.

In every case, a budget is a crucial tool for tracking your spending and making sure you reach your financial goals. Here’s our top tips for creating a budget that works for you.

 1.    Calculate your income and fixed expenses

The first step in building a budget is taking stock – financially, where are you now, and where you will be at the end of this month?

Start with your ‘net income’ – the amount of money you have left over each month after taxes. You will then usually have a number of fixed expenses, such as bills, food shopping and childcare expenses.

These are often your ‘essential’ expenses, that don’t vary much from month to month. It’s still important to review these, as you may be able to find cheaper alternatives to your supermarket shop or gym membership to help you towards your saving goals.

Most importantly, comparing your income to your outgoing expenses each month will help you judge how sustainable your spending is – and how much of your income is truly disposable or able to go towards savings.

You can use our expenditure calculator to calculate your income and spending.

 2.    Review variable expenses

 Once you’ve subtracted your fixed expenses, you’re left with your disposable income.

What isn’t put into savings straight away is usually divided between leisure purchases, subscriptions, etc. These expenses will likely change every month – hence the term variable expenses – so they can be a lot harder to calculate.

You may have spent more than usual on variable expenses over the holiday period, so your recent bank statements may not be as helpful to set your budget going into the New Year. Try looking further back to get a better idea of your spending throughout the year.

Your budget helps to regulate this area. You can make a limit for how much you will spend per week or month for each item on your budget. There are lots of different ways you can structure your budget to allow for your spending and saving goals.

3.    The 50/30/20 rule

This popular rule of thumb for budgeting comes from current US Senator Elizabeth Warren. The purpose is simple – dividing your spendable income into three categories:

• Spend 50% on needs – these include bills, food shops, transport, etc.
• Spend 30% on wants – these are the fun parts you choose to spend your money on, such as subscriptions and meals out.
• Put 20% in your savings – this could be towards your saving goals or paying off existing debts.

Of course, you may need to adjust this rule to your individual circumstances, but the structure is a good way to decide which of your ‘wants’ are worth keeping, while still putting money towards your savings.

4.    Set goals and challenges

Now is a great time to set a savings goal for 2022. One way to motivate yourself to save is by making it a challenge. Dr Barbara O’Neill suggests making a weekly saving that corresponds to the number of the week – £1 in the first week, £2 in the second, and so on. If you are able to stick to that, by the end of 2022, you will have saved £1,378.

Whatever your saving goals, make sure they’re right for you, and keep checking in on your progress. Your budget is specifically for you – so don’t be afraid to change it if it’s not working.

Budgeting is a powerful tool for securing your financial future. For personalised advice on your finances including making financial plans, mortgages and investments, get in touch or call 121 285 8528.

Disclaimer: The purpose of this blog is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.

Disclaimer: As a mortgage is secured against your property, it could be repossessed if you do not keep up the mortgage repayments.

Disclaimer: The value of your investments can go down as well as up, so you could get back less than you invested.

 

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