Regardless of income, budgeting is a key financial tool which everyone uses, either consciously or otherwise. When you decide to make a purchase, the decision is usually preceded by considering if you have the funds to make the payment. If you don’t have the funds, you may consider how important the purchase is, and therefore whether you need to use credit. If you choose to take out credit, you’ll likely have thought of your future financial circumstances and whether the repayments will be affordable.
This decision making process may happen in just a few seconds, but it is still a form of budgeting. From day to day living expenses to ensuring you have enough money to meet mid-month priority bills, budgeting is creating a plan to assist your financial decisions.
For people who want to take control of their finances and manage their money effectively, it’s not always enough to have a basic budget outline. You need to create a sustainable financial plan that you can stick to. Making a successful budget doesn’t just mean having an accurate view of your income and expenditure but making sure that every penny counts. You don’t need to overthink every single purchase you make, but it might include designating certain funds to invisible spending or ensuring you’ve transferred money into your savings account before going on a shopping spree.
A sustainable budget is a budget which can be maintained and upheld even through times of cashflow shortfall. The first step to having this kind of budget is ensuring your income meets or even exceeds your existing expenses. The second step is having a plan in place to build your financial resilience in case of future financial difficulty.
Ideally, a sustainable budget means being able to put money into a savings account so you can meet emergency costs head on. Unexpected payments cost an average of £300, so if you can save £50 a month for 6 months, you’ll have enough money to meet most unexpected payments without taking out credit. However, you should continue putting money into your savings account even after you’ve reached your savings goal, so make sure your monthly saving target is not only achievable, but viable long-term.
This can be done by allocating funds to a savings account when you get paid, rather than transferring any remaining money into your savings account at the end of the month. While you may need to be strict at first, creating a good budget and sticking to it is a skill that becomes a habit.
The goal of sustainable budgeting is to provide you with the financial resilience to bounce back from unexpected income shocks. A recent study by the Financial Conduct Authority (FCA) showed an increase in low financial resilience among consumers due to the impact of Covid-19. Although the economic effects of the pandemic are not expected to be permanent, it can still take a long time for people to rebuild their financial resilience to pre-pandemic levels.
While budgeting may sound like a flimsy financial trick, it really is worth doing. You may shock yourself at how much you spend on subscription services or takeaways each month. While you don’t need to omit these niceties from life completely, being aware of your current financial commitments can help you manage your money more effectively. Additionally, budgeting can help you feel in control of your finances. Often, people don’t want to discuss money or ask for help when they’re worried about their finances because they are too embarrassed to be struggling with any sort of difficulty. The likelihood is that everyone around you has some financial issues they are trying to straighten out. Some may be more adverse than others, but they are all equally deserving of resolution. Financial resilience forms part of your financial wellness which contributes to your mental and, in some cases, physical health. Having a sustainable budget can reduce money related stress and anxiety.
Financial resilience might be a daunting term, but it’s achievable through accurate budgeting and financial awareness. If you know you want to save money, but creating a long-term budget seems disheartening right now, then trying some straightforward savings hacks to start with might be easier.
A guide to managing your money: The Invisible Spending
A guide to managing your money: Saving
A guide to managing your money: Top Money Management Tips
The Polar Credit Info Hub has several money management guides and articles about different financial products to help you improve your financial health.