If you need to cut down on your expenses, one of the best methods of doing so can be by sticking to a budget. The key to good budgeting is about working out how to use your income for different essentials, luxuries, and savings in an efficient way.
However, this can sometimes be difficult to do. You may be prone to over- or underestimating how much you actually spend on different things. Furthermore, it can be hard to break certain habits, such as spending too much on treats or luxuries each month.
Your monthly income and essential expenses should all be calculated, along with what you’re likely to spend on leisure, and how much you want to save. It can sometimes be difficult to know what should go into your budget and how you can stay on top of it, so read on to find out more about basic budgeting and how it could help you save money.
Before you start thinking about what goes out, you need to consider what comes in
This may sound obvious, but it’s important to remember that your budget is based entirely upon your income. No two budgets are the same, and yours should be made to reflect your situation.
It can be key to work out how much you are making on a monthly basis and consider whether your income fluctuates. If you are paid hourly, it’s a good idea to try and find a monthly average.
It’s also important to have open, clear discussions with the people you live with about your financial situation. It can sometimes be difficult to talk about money issues with those you’re close with, but it can be vital when agreeing upon a budget. This is especially true when it comes to your partner.
Having clear expectations when it comes to the financial aspects of your relationship is important. Knowing who is responsible for paying what and understanding each other’s situations can help you plan more effectively. It might not be a fun topic to discuss over dinner, but it is a crucial one.
It’s important to identify and understand the difference between your needs and wants
There’s a clear difference between necessary and luxury expenditure. Anything you pay towards the essentials can be classed as necessary expenditure, or your needs. These include:
- Your mortgage/rent payments
- Your bills
- Replacement clothes
- Your weekly food shop
Anything you pay towards things you don’t truly need can be considered luxury expenditure, or your wants. These include:
- Restaurant meals
- Cinema trips
- A new television
- Subscription services
Don’t forget to include annual payments in your calculations. Things like your MOT and insurance payments might fall under your essential expenditure while gym memberships and holiday payments may be considered a luxury.
The 50/30/20 method is one popular way you can budget
Identifying the difference between the two types of payment is key when it comes to implementing different budgeting methods. This is especially true for one of the most popular methods, known as the “50/30/20” method.
This method attempts to split your monthly payments according to your income, on a percentage basis. Like this:
- 50% of your monthly expenditure should go towards your needs
- 30% should be spent on your wants
- 20% should be put away in your savings.
This method is effective because it’s simple. It doesn’t require hours of micromanaging and can be easy to work out. It can also help you identify what you may be spending too much on, and what good habits you need to keep up.
However, it can also be a little too loose in its definitions. You may be more likely to break the rules around this budget and spend a little more on the things you shouldn’t because it isn’t managed closely.
While a 50/30/20 budget may work for some, it may not be right for you. Perhaps you need a stricter method, or you may have a specific savings-based goal in mind that you want to work towards.
Try paying yourself first by making your savings a priority
The “pay yourself first” method of budgeting focuses on putting away a certain amount of money as soon as you receive your income and spending the rest throughout the month.
This is typically used by people who are saving for multiple things at the same time, or when saving for a particular goal with a specific time frame.
This method is also good for limiting what you spend on luxury items, as you’re less likely to go over your allowance when it means you might not have enough to get by at the end of the month.
A “zero-based budget” ensures that your income and expenses add up perfectly
Another alternative is the “zero-based budget” method, which puts every penny to good use. This method is good if you want to be entirely in control of your money and want to get the most out of it.
This budgeting strategy essentially involves making a detailed plan of your monthly costs and ensuring that your income and expenditure add up perfectly to zero.
Zero-based budgeting deals with exact figures and assigns a role to every bit of your income. While this method does allow for very detailed financial planning, giving you the ability to fully control where all your money goes, it can also be incredibly time-consuming.
It can sometimes be difficult to tell exactly what your money will be needed for in the month ahead. Plus, an unexpected cost may throw your budgeting plans off course.
One size doesn’t fit all when it comes to budgeting
At the end of the day, your budgeting method and the amounts you set aside should be personal to you and your financial situation. Deciding on a budget is no easy task and planning how to approach it requires some research.
If you’re unsure of where to start with a budget or need help understanding what should be included and how to approach it, get in touch. We can help identify your needs in relation to your spending and develop a plan for your future.
We can tailor your budget to your specific needs and help you put it into practice. Whether you have clear financial goals, are trying to add to your pension for later life, or just want to save a little extra each month, creating a budget with us can help you achieve whatever you’re planning.
Get in touch
If you want to know more about budgeting and which method may be best for you, get in touch. Email enquire@london-money.co.uk or call us at 0207 808 4120 to find out more.