Understanding Money – Budgeting
Welcome to our series on understanding money. We hope this will help you make some headway into understanding, and getting a hold of your financial matters. This is written from the UK perspective, but we welcome comments, comparisons, and questions from any country! It’s always good to know how money works on an everyday basis for different people around the world.
Budgeting is a way used in getting control of your money. If you’re living payday to payday, or just wonder why you never seem to have much money left over at the end of the month, or you just want to know where your money is going, then you need a budget. In fact, I’d say you need a budget anyway, even if none of the above apply to you.
If You Fail to Plan, You’ve Planned to Fail
Having a budget means that you are planning where your money goes, and then making it do what you want, rather than your money going off on its own and you wondering where it went.
If you’re sick of being in a bad situation with money, the first thing you need to do is decide to make a change. Do you REALLY want to get in control of your money? Then you need to take action. Make some time to draw up a simple budget. Having a budget is not good enough on its own. The most important thing is your attitude towards spending. Do you really need that £500 coat? No. But you may genuinely need a coat. Needs and wants are very different.
How to Make a Budget
It took me until I was over 25 to learn how to make a budget. This is because I just had no financial education whatsoever. The only stuff I knew was bits and bobs I’d learnt along the way, whilst I stumbled through life going form one part-time job to the next. It took until I was made redundant to get my act together and start planning a bit more what I wanted to do and where I wanted to go… and eventually who I wanted to be.
So I started reading books on investment and websites like MSE to get my head round everything. I came across an absolutely fantastic piece of software, well, back then it was just a collection of spreadsheets, called YNAB – “You Need a Budget”. I was like, ‘Yeah! I DO need a budget’. The best thing about it, was the free email course that came with it. This was what helped me get my attitude straightened out. I highly recommend YNAB for people who are afraid of numbers (like me, I’m a words person) as it will just help you, simply, to get your head around everything.
The simplest way to make a budget is to write down all your monthly essential expenses, e.g. mortgage/rent, gas, water, electricity, phone, broadband, mobile, food, petrol, train tickets, etc. Everything that you absolutely need. Don’t forget to include a line for savings, even if it’s just a small amount to go towards replacing something like your tv or kettle if it breaks. Then add in a little for ‘fun money’ like money for a hobby. If you don’t add that in, you’ll probably go crazy. Then you add all these mandatory expenses up and see how much the total is. Deduct that from your monthly income and see what’s left… hopefully there will be something left!
So here’s a completely random example I made up on the spot of someone living in a flat somewhere in the UK:
|Total =||£1,808.00||Leftover =||£68.23|
Thankfully, even though some of these expenses look crazily high, there is at least a little left over every month. If there is nothing left over… then you’re in trouble! You need to cut out some of your expenses, or learn how to reduce them, such as swapping to a cheaper mobile phone tariff in this case!
When we write things down, it gives us a chance to look at things clearly. We see where our money is going, and we can see that some things look surprisingly expensive. Like, why am I spending more on my phone than my gym membership?! And why am I spending £350 a month on food? That could buy me a flight to the USA!
Getting a Grip of Reality, and Thus, Our Money
Having had lots of part-time jobs, I never really had much money, but I did used to have a lot of time. I really liked this, but I didn’t want to work like a slave for 40 hours per week, when there were better things for me to spend my time doing. I wanted to make sure that even if I only earnt a small amount, I would not go into debt and wouldn’t have to work like a slave to survive. So, I bit the bullet, and made a budget for the first time in 2004, when I was 23 years old, and had just moved out of home for the first time. However, my budget consisted of a few basics, and all the leftover money being spent on whatever the hell I wanted, which basically meant wasting it on going out, and buying lots of random computer parts.
As I mentioned earlier, it took until I got made redundant to really get a grip on reality. I had no money to fall back on. No savings out of what was actually a high wage I used to earn at the age of 23. Not a penny. I went from my own cottage, to sleeping on a friend’s couch. It was now or never to start deciding what the hell I wanted to do with my life, and organising my money was one of the first parts of it.
If you have any kind of goals or dreams for the future, they are probably going to take time, effort, and some money to accomplish. It’s essential to get a grip on your money before it’s too late and you’re left with a pittance to live off.
There are few different methods of budgeting, one of the most famous is the envelope method. You put the required amounts for each spending category into little envelopes (actual cash into an envelope called ‘petrol’ or whatever, but we can do this on the computer nowadays, I guess) every time you get paid. Then you send the money out as and when it’s needed, like little aeroplanes, zooming off to their respective destinations!
Here are some different methods of budgeting:
- Standard budget – this is as above. You just choose what to spend, then spend it every month. Hopefully you have money left over, and hopefully you didn’t blow your categories;
- Zero-based budget – this is the YNAB method. You count down your money from the full net income all the way down to zero, so essentially, every pound has its job to do. If there is money left over, you have to allocate that too. Every pound must do its job, and there is no slacking allowed;
- The no-budget budget. Maybe this should not be called a budget at all, but some people do not have one, and yet save a lot and live frugally. How is this possible? Well, before they spend any money, their mind is aligned to spend nothing by default. They ask themselves questions like: ‘is this the best value and best use of my money right now?’; ‘is this money being spent absolutely essential?’; and ‘could I get this essential item cheaper somewhere else?’.
Another method I quite like is the ‘live on a basic wage’ budget. For example, the minimum wage for an adult age 21+ is £6.50 per hour. This works out to £13,520 per year, or £1012.36 per month, net if you’re working 40 hours per week. The beauty of this method, is that it helps you to appreciate what you’ve got, well, unless you’re actually on the minimum wage I guess, and put yourself in someone else’s shoes. But even if you are on the minimum wage, you’re better off than many around the world who have no running water, and maybe even no shoes… when you start thinking along those lines, you think twice about signing up to that £40 per month mobile phone contract. We always have reasons to be thankful.
The Most Important Thing to Learn About Budgeting
It’s about your mindset, and your view of the future. Money can generate a lot of emotions, but essentially, do you want to be alive tomorrow? Next month? Next year? What are you going to be doing in a year’s time? In five? In ten? If you’re spending more than you earn, you’re robbing from your future self. Yes, you’re a thief. Borrowing Peter to pay Paul is not a way to secure your future. Maybe you have dreams to visit San Francisco, or go surfing in Australia. Maybe you love motorbike and you want to drive across Europe for the whole Summer. If you want to achieve things in life, you have to face up to reality and actually decide what you want to do, and how you’re going to get there.
How are you budgeting for the future? Let me know, leave a comment below.