Understanding Procedures for Setting up a Budget

Budgeting is a process whereby individuals or households assess how much they are spending, what they are spending it on, and how they can save more money. Setting up a budget is an invaluable step regardless of how disciplined you already are with your money, but will deliver the biggest benefit to those who feel that their current finances are a bit chaotic.

When the term “budgeting” is mentioned it sometimes elicits looks of horror or concern as people are often unsure what it involves or how easy or difficult it is to implement. The good news though is that budgeting doesn’t require you to be a mathematical genius or to have a degree in banking. It is, in fact, extremely easy and straightforward, which is partly what makes it so powerful.

Step 1: Write down how much you are spending each month:

An easy way to do this is to review your bank statements. Or, alternatively, you could just agree to keep all your receipts for a few weeks and then add up your spending.

Tip: A budget can be written on paper but, for those with access to a computer, it’s usually easier to record your budget on a spreadsheet. You don’t need any specialist software however.

Step 2: Work out what categories of things you are spending your money on:

One of the purposes of a budget is to identify where your money is currently going. However, rather than having a long list of every single purchase, it’s more powerful (and easier) to split your costs into spending categories.

Examples of spending categories might include such things as:

–         Utility Bills

–         Mortgage/Rent

–         Commuting

–         Entertainment

–         Eating out / takeaway food

–         Food/Groceries

Having created your spending categories, you should only need to go through this process of adding up costs once per month, and it will give you a clear indication of your money hot spots!

Step 3: Enter your monthly income (after tax) and discover your disposable income:

When managing our finances, our initial target should be to live within our means. And then, having achieved this, you can go on to more stretching targets such as maximizing the amount of disposable income that you can put into a savings account or investments.

To help you assess how you are doing in these targets, it’s important that your budget document shows how much you are earning as well as how much you are spending.

An easy way to identify the right figure is to look at your salary slip and enter the quoted “Net Pay” figure. The reason we use the net pay figure rather than the gross pay amount is that unfortunately the government takes away a percentage of our salary in taxes!

Now that you have recorded your income (and maybe also your partner’s) and your spending, you are in a position to see whether you have any disposable income and, if so, how much. Disposable income is just a term used to describe how much money you have left over at the end of a month once all your costs are subtracted.

Let’s look at an example:

John’s income: 2,000

Sarah’s income: 1,000

Total Income: 3,000

Total spending: 2,500

Disposable income: 500 (i.e. 3,000 – 2,500)

Step 4: Set monthly budgeting targets:

Having identified how much you are spending, what you’re spending it on, and how much (if any) monthly disposable income you have, you are now ready to start to improve your finances.

Any time that we want to improve at something, it’s necessary to set targets and then work hard to achieve them. This is certainly true when it comes to managing one’s finances and overcoming the spending temptations that may be present.

Typically, individuals will set themselves a high level target such as “Reduce monthly spending by 10%” and may also then drill down to their spending categories to identify key things that they want to cut costs on. For example, if you tend to incur a lot of money on meals, then you might set a target of reducing spend on the “Eating out / takeaway food” category.

Step 5: Monitor performance on an ongoing basis:

Reviewing your finances occasionally is a little better than never reviewing them, but not much. If you are serious about becoming good with your finances then it’s vital that you make budgeting a regular part of your life. You don’t have to update your budget every day or even every week but you should try to review it every month in order to get value from it.

It’s nearly always possible to cut some quite big costs from your spending straight away but you should then continue to look for further opportunities to be more lean in your financial management. Incidentally, cutting costs doesn’t have to mean doing without the things that we enjoy doing. You can still have your luxuries provided that you cut out the things that aren’t really necessary and/or get better value for things that you continue to buy. There are plenty of other articles on Helium that are devoted to ways of getting items cheaper, so I want go into detail here, but examples include switching to cheaper utility providers, switching to own brand supermarket items, and taking your own sandwiches to work rather than buying them from your staff canteen.

Step 6: Incorporate your budget within your broader financial planning objectives:

Life is not just all about cutting costs and it would be very boring if it was! The reality is that we all have hopes and aspirations about our future. We may have ideas about how long we want to work for, where we’d like to move to, or we may be thinking about getting married and starting a family. Whatever our long-term life aspirations are will influence how much money we need to save up and it’s important that you remember that your budget is a core part of how you achieve these dreams.

On this point, one of the main reasons why some people fail in their budgeting aspirations is because it starts to feel like a chore to have to monitor their spending. To overcome this, it can be very beneficial to put up a visual reminder of why we are trying to be good with our finances. Maybe you have your eye on a dream house in the country. If so, then why not cut out a picture of the kind of house and setting that appeals to you and pin it up above your computer. Every time you sit down, you will be reminded of your long-term goal which hopefully will give you that added spur to keep persevering with your budgeting and financial management!