Believe it or not, ‘budget’ is not a dirty word. It’s the one word that could make the world of difference to your family finances.
The very notion of budgeting can conjure up grim images of living on beans and wearing three jumpers instead of putting the heating on, but drawing up a realistic budget and learning to live within it is the single most important thing you can do to keep control of your spending and avoid unmanageable debt.
So where do you start?
Step 1: Work out what you spend
The first step to budgeting involves taking a good long look at your current expenditure. This isn’t something you can do in an hour so clear your diary, switch your voicemail on and make a pot of strong coffee. Better still, set aside an evening and pour yourself a stiff drink before you start – you might just need it. (Just one, mind, we’re budgeting, remember, not partying.)
Trawling through your expenditure isn’t exactly exciting. But when you start seeing results – the savings you can make through wiser choices, and more disposable income because of more savvy spending - you’ll start to see the point.
You'll need to have to hand all your financial paperwork, including the last three months’ worth of bank and credit card statements, and details of all standing orders and direct debits. If you’re as disorganised as I was when I first tried this it might take a while just to lay your hands on the details but it’s even more worthwhile if that’s the case. Keeping track of everything you spend for a month or two (on food shopping, for example) will help paint a realistic picture of your expenditure and help you find a budget that’s right for you.
The objective of this process is to establish whether you spend more than you earn. But don't panic if you do; you can redress that balance, and that’s exactly what a budget will help you do. In the happy event that you earn more than you spend, budgeting can help you make the most of every penny. Try writing down everything you spend for a month, or three months if you can bear it. Be brutal. Include absolutely everything, from impromptu coffees to newspapers and unplanned take-aways or drinks after work.
One mistake people often make during this process is to leave out the little items like stamps or magazines or to ‘forget’ to include bigger indulgences because they feel they shouldn’t really be spending that much on haircuts or manicures when they’re trying to budget. But the point of this exercise is to establish what you spend, where you can save, and how you can gain financial freedom by making sure there’s enough in the pot to meet your needs, and some leftover for rainy days, savings, or unexpected emergencies like redundancy. The only way to do that is to track what you really spend, with total transparency. It might hurt a little but in the long-term it can save a lot of trouble and heart-ache.
Step 2: Add up what you earn
Next calculate your income and include every single penny, including your net salary and any extras like child benefit etc. Then have another drink and check whether the total income figure is bigger or smaller than the total expenditure. Once you’ve established the facts, it’s time to assess how much money you need to shave from your current average monthly expenditure. If you’re overspending or relying on credit cards to make up the shortfall between your income and your expenditure, it’s time to make some radical cuts.
Step 3: Identify areas where you can pay less
One of the real perks of budgeting is identifying areas where you can save. The bottom line is there is probably a better deal to be found on almost every bill you pay; the secret is learning how to find those deals, and remembering not to take the first price you’re offered. Shop around until you find the best deal you can, and then ask for an even better one!
Some potential savings will be more obvious than others but think creatively about how you can pay less for every single purchase you make. If you end up buying a magazine every month consider a subscription which is likely to be cheaper in the long run. Place an order with the milkman instead of buying milk (and ending up with extra non-essentials) daily in the supermarket. Take advantage of offers like booking several haircuts in advance to qualify for loyalty savings. And scour the internet for deals like the ones posted every day on here or at hotukdeals to make sure you’re not paying a penny more than you absolutely have to.
Step 4: Set your target monthly budget
Once you’ve identified where you can save and worked out what adjustments you need to make to your spending, draw up a monthly budget for all your expenses and livings costs. You might budget £50 a week for groceries, for example. The next challenge is to stick to it! But if you’ve done all the legwork up until this point, you should get some real satisfaction from knowing that following your budget means you’ll be able to afford to pay off your credit card or book a summer holiday. It can help to set specific financial goals at this stage, and your priority should be paying off credit cards and controlling debt as that’s really the road to financial ruin.
Step 5: Celebrate! Then stick to the budget
If you make it to this stage, you should be very proud of yourself. It's not an easy process - I think I wept for a week when I first added up all our financial commitments and expenditure - but it is a process that can actually change your life. All budgets need adjustments to keep them realistic so don't feel like you can't ever spend a penny beyond your limits and do review the figures every few months. But for now congratulate yourself for facing up to your financial reality, and then stick to your budget as if your life depended on it. Because one rainy day in the future, it just might.
Next week, Lisa Wynn, a life coach and founder of Coaching for Dads offers Playpennies some exclusive tips for making a budget work.