Budgeting is the type of phrase that conjures up images of spending less, going without and generally having an unhappy life. However, successful budgeting is key to ensuring you live within your means and have surplus income to fund your future plans.
Firstly, let’s get rid of the word budgeting. From now on, we will refer to it as a spending plan. A spending plan is a more positive phrase that reflects what we are doing, i.e. planning our spending to ensure our income is allocated to the areas of our life that are important to us.
Pay yourself first
Rule number 1, pay yourself first. This means working out what you need to save on a regular basis to make your financial dreams a reality, and ensuring you save and invest this amount (or the most you can manage) before you pay any other bill. Why is this so important? Often if we are left to our own devices, we will spend all of the surplus available to us, meaning we don’t save enough for the future.
So make sure that the first direct debits to go out in your spending plan are to savings, investments and pensions.
Next, work out your basic expenses that pay for your life. These will be your day to day bills such as your mortgage payments, food, insurances, utilities, school fees, etc. Basically, anything that is a fixed cost that you need to pay in order for your household to function. These should be paid next.
A good way to start with this area is to look at each item of your current spending and assess it from 2 angles…
- Is it essential?
- Is it as cheap as it can be?
For example, your gym membership, although important to you, isn’t essential to your life (don’t worry, it fits into the next section). Whereas, the car insurance is essential, but you may not have checked it’s a competitive premium for a while.
Once you have invested for the future and covered your fixed bills, you then have an allocation in your spending plan for having fun now! This is for having fun and funding your lifestyle such as paying for holidays, eating out, going to the theatre, weekends away and other things that make you happy (such as your gym membership).
By having a specific amount set aside to be spent on having fun, it ensures you enjoy today at the same time as saving for tomorrow whilst making your spending plan something realistic that you can stick to.
How these sections are allocated will be very individual. For example, the amount you invest for your future will be a balance between how much you can afford, and how much your financial plan dictates you need to save to make your future goals a reality.
If you’re not sure where to start, a good system to use is the 50/30/20 rules. This broadly translates to using 50% of your net income for ‘living’ expenses and bills, 30% towards enjoying yourself and 20% towards saving for the future.
Automate, automate, automate
A key for this whole process is to automate it as much as possible. Use standing orders, direct debits and separate accounts. This makes it less likely that you’ll forget to move money, spend too much or be tempted to circumnavigate your own rules.
If you would like some guidance regarding your own spending plan and how to balance living for today versus saving for tomorrow, please do get in contact.