Is your usual reaction to opening your online banking “ohhh crap”, followed by a “but wait, this can’t be right!?” For many years this is what happened every time I opened online banking. Fed up of not knowing where the hell my money went I decided it was time to sit down and start budgeting my money. Here I’ll tell you the process I went through to set my first budget, as well as a couple of ways I manage to stay on track of my finances each month.
1. Get organised
Keeping on top of your finances can be boring, but so is eating super noodles every day because you’re broke…. When it comes to being in control of your finances, a little organisation goes a long way. Take the time to sit down and set yourself a monthly budget. If “budget” seems too boring, call it a “Monthly Money Plan”, a “Fascinating Finance File”, whatever you want.. your bank balance will thank you later!
2. Find out your monthly income
A crucial part of budgeting is understanding how much money you start with each month. Find one of your latest pay cheques and calculate your monthly income once all the taxes have been taken out. Note this number down, either on your phone or by creating a new excel sheet. I personally find that an excel spreadsheet is the most useful tool when creating a new budget. I have created a free budget planner that you can download by signing up to my newsletter here!
3. Find out your fixed expenses
Next you’ll need to find out how much money is definitely going to come out each month. This is all of those annoyingly expensive reoccurring costs, like your rent, travel, phone contract, gym membership etc. that you are committed to pay. You may know individually how much these things cost, but it’s important to understand this number as a whole. If you’ve made an excel spreadsheet then you can either add this number to the cell below as a total, or you can list each individual fixed spend. You can now see both your income and your outgoings together.
4. Asses what’s left
Once you know what your income and outgoings are, you can assess what you’ve got left to play with. Use the formula Income – Outgoings = What’s left. It’s important to think about your priorities here – do you want to save a tonne of money each month, do you want to have a wardrobe full of Topshop gems, or do you want to spend it all socialising with your pals? Once you’ve figured this out you can split the remaining money into categories, such as groceries, eating out or clothes. For example, say you have £350 a month left after your fixed expenses, allocate £150 towards groceries, £100 towards eating out, £100 towards clothes. Remember budgeting only works if you’re honest with yourself – there’s no point saying you’ll only spend £20 on beer if you know it’s more likely to be £50.
5. Track your spending
But how’d ya know what you’ve spent so far..? Monzo is an online only bank that lets you input monthly targets by category. I’ve found it hugely helpful for budgeting effectively. As the month goes on you’ll easily be able to see where you’re spending your money. If you’re massively overspending in one area, now is the time to figure out which area you can cut back on to compensate. If you don’t have Monzo then updating a spreadsheet weekly with what you’ve spent can also be useful. Being mindful of your money in this way will make it last longer. Reducing that 14 days, £14 until pay day conundrum we’re all used to.
6. Evaluate your budget
So you’ve worked out your monthly income, outgoings and how you want to split your money, but have you managed to stick to the numbers? You may be surprised to find what you think you’d spend on certain items is actually very different. I certainly was! This is why evaluating your budget is an important step in mastering your money. It’s important to not be too hard on yourself here. Getting your budget right will take time and lots of tweaking! Play around with the categories you’ve set up, and the amounts you’ve allocated to them. You may also find that more specific categories, such as one for coffees and cabs, will help you evaluate how you spend your money as you see the numbers start to rack up!
And lastly, congratulate yourselves. Setting and sticking to a budget will give you the financial freedom you have always dreamed of – allowing you to spend your money on the things you really (really) want.