Budgeting your money can help you to maximise your income and avoid debt. Here’s how to get started.
Without setting a budget it’s difficult to know where you stand with your money each month, making it easy to overspend. If you find yourself constantly missing payments due to overspending, then you’re at risk of getting into debt.
The first step towards gaining control over your finances is to have a good understanding of your income and outgoings.
You can save yourself an inordinate amount of stress and worry by following these simple steps to work out a budget and stop your spending habits spiralling out of control.
Step 1 – Work out your total income
Make a list of all your sources of income. This may be simple if you receive the one fixed salary per month, but for those who are paid different sums at different times, it could be a little trickier to work out. If your income isn’t straightforward, try looking at the bigger picture by working out an average monthly income based on the last 6 to 12 months. You should include all payments that come in regularly, like benefits or a pension.
Step 2 – List your monthly expenses and sort into fixed and variable
This next part may take a little longer. Gather together all your bank statements to work out your average monthly expenses. Some of the expenses will be fixed amounts that rarely change, like your rent or mortgage, council tax and utility bills. Whilst others like food shopping, petrol and entertainment expenses will vary from month to month.
Step 3 – Work out your net worth
Once you have the two figures, your average monthly income and average monthly outgoings, subtract your outgoings from your income to find your net worth. This can be a real eye-opener. If you have some money leftover then things are looking good so far, but if you have a negative net worth it’s time to make some cutbacks.
Step 4 – Make any necessary adjustments
If you’re overspending each month then you need to revisit your list of expenses and see where you can make cutbacks. Variable expenses are often a great place to start, but you may also be able to reduce some of your fixed bills if you shop around on websites like compare the market and uSwitch.
If you have a positive net worth then you’re not off the hook! The ideal budget leaves no money unaccounted for. If you have money ‘spare’ at the end of the month you may wish to create a new entry on your list of expenses to pay money into a savings account. Treating saving money as another monthly expense encourages you to be stricter with saving.
Step 5 – Review your budget regularly
Once you’ve got your budget all worked out it’s important to be strict with yourself and stick to it. Remember that living costs are constantly changing so your budget will need regular reviewing and amending to keep it working effectively.
If you’re having financial problems, get in touch with one of our experts here at Irwin Insolvency on 0800 009 3173 for free and impartial advice.