As the saying goes “If you fail to plan, then plan to fail”.
Creating a budget allows you to gain a better perspective of your current financial situation and plan your future spending accordingly. The financial plan will ensure that you always have funds for your essential living expenses and may break down your disposable income to save towards other important goals, such as buying a car or a holiday.
We understand that sometimes it can be overwhelming to think about your finances, especially if the picture is not too rosy, so we created this step by step guide to budgeting!
Setting up a budget and getting back on track has never been easier. Follow the steps below to get started.
Work out your current monthly income after taxes and other deductions, such as national insurance, pension and any travel ticket loans, have been applied. This figure is also known as your take home pay or net income, as opposed to the gross income which is the amount of money you earn before all deductions have been applied.
Next, calculate your average monthly expenditure.
You should begin with your fixed and regular monthly expenses, such as rent or mortgage, your phone bill and council tax. Knowing exactly how much goes towards your essential living costs is important to understand your overall monthly expenditure.
Then calculate your average variable monthly expenses for the last 3 to 6 months. These are likely to include some of the essential bills such as food, fuel and utility bills, as well as non-essential costs such as entertainment expenses.
You may choose to break down your expenses even further into categories such as utility bills, living costs, travel, leisure etc to help you identify opportunities where you may be able to cut back on your expenditure to come up with your revised expenditure going forward. Non-essential spending is the area where most people can make sacrifices.
Adjusting your habits can go a long way. For example, preparing your lunch at home and becoming aware of your “invisible” spending can save a significant amount of money that can be put towards reaching your goals.
Create an income and expenditure spreadsheet, detailing your income and revised list of expenses. Work out your discretionary income, the income available to you after all the taxes and deductions have been applied and your expenses have been paid for. This is the amount of money you can redirect towards other goals.
Make a list of all your short-term and long-term financial goals. The short-term goals are things you can usually accomplish within a year, for example saving for a holiday or a new sofa. The long-term goals will take longer than a year to accomplish, for example saving for your child’s education or your retirement.
Depending on how much discretionary income you have and how quickly you wish to reach each goal, you may have to prioritise your goals in order of importance. For example, paying for a trip to the dentist may be more pressing than a trip to Tenerife.
Now that you have your discretionary income calculated you can decide how much you want to put aside each month towards your goals. This may be dependent on how quickly you are striving to achieve each goal and what is realistically possible given your current financial circumstances.
Reviewing the budget on a regular basis will ensure that your targets are realistic and that you adhere to the agenda. Often emergency expenses may arise, which can throw you off course to reaching your goal. It is important to adjust your monthly budget accordingly and recalibrate your target.
Now that you have your step by step guide on budgeting, you can get started with creating your own! You don’t need anything more than pen, paper and a calculator, however it may be more feasible to create your plan using computer software that allows you to save and edit it.
If you prefer to use a more automated tool, The Money Advice Service offer a free online Budget Planner. The planner will calculate a detailed breakdown of your finances and give you tips on how to use your money efficiently.
Your budget will rely on your best estimation of your income and expenditure, however many factors come into play in managing finances. For example, emergency expenses can creep up unexpectedly and steer you off budget.
Experiencing temporary shortfalls in your monthly budget can cause distress to everyone in the household relying on the budget. We created Polar Credit to provide you with access to credit in a fast, easy and transparent way so you don’t get left out in the cold.
Polar Credit is a revolving credit facility that can help with your monthly expenditure. If you are approved, an account with us lets you withdraw funds when you need to, with cash transferred to your bank account within minutes of approval. You can apply online and use your Polar Credit account as and when you need to.
We do not offer debt advice but seeking advice from an expert can be beneficial to help get your finances back on track. If you are worried about your financial circumstances, you can speak to an independent debt advisor such as StepChange or National Debt Line.
More questions? Visit our FAQs section.