Tearing up your monthly budget and starting from scratch
A guide to personal finance management
Whether you're a sensible spender or someone who shies away from checking your bank balance for fear of what you'll find, budgeting is a useful exercise for keeping control of your personal finances. It's actually simpler than you might think, and in today's post, we're going to guide you through the process to help you create a brand new budget from scratch.
What are your goals?
There are lots of reasons why you might be wanting to tear up your monthly budget and start from scratch, and the look of your new budget will depend very much on what your financial goals are. That's why it's helpful to begin by having a clear aim in mind from your budgeting efforts. For example, you might be wanting to:
- Get control over your finances - because you're never sure where the money goes each month and feel you need to rein in your spending
- Save money - you're saving for something big, such as a house deposit
- Pay off debts - perhaps you owe money for a loan, or you're fed up of living in your overdraft or on credit cards
- Free up money for fun things - you want to spend more money on a particular hobby and need to make cuts elsewhere
Your revamped monthly budget will look different depending on what you want the outcome to be, but the next step will look the same regardless of what your aims are...
Assessing your existing income and expenditure
Having identified your goals from starting your budget afresh, the next step is to gain an accurate picture of what's going on with your finances at the moment. Scouring your bank statements and receipts from the last three months, make a detailed spreadsheet recording your monthly income and expenditure. There are plenty of free templates available to download online if you aren't sure where to start - just Google 'free budget template' or use one in Excel.
Your spreadsheet will need to include:
All sources of income - such as:
- Your salary
- Income from side projects
- Child support and other benefits
- Lodgers or tenants
It's harder to add up your monthly earnings if you're self-employed, as it will vary, but you can take your average earnings from the last three months for the purposes of this exercise. The same applies if you have income from a 'side hustle' to bump up your monthly earnings, which may also mean you have business loan repayments to consider in your list of expenses.
More and more people are using business finance and start-up loans in order to take advantage of the "gig economy" and set up side jobs in addition to their 9-5. This can help massively when it comes to having more money left over at the end of the month for the nicer things in life.
Fixed expenses, such as:
- Rent or mortgage
- Utilities - gas, electricity, water
- Phone bills
- TV licence
- Home and contents insurance
- Recurring payments, e.g. memberships
- Fixed car expenses - tax, MOT, insurance, car repayments
- Loan repayments
Expenses that vary, such as:
- Food - groceries, restaurants, takeaway coffees
- Holidays and days out
Take the average amount across the last three months to give you an idea of your typical monthly spend on these varied expenses.
Finally, at the bottom of each column, add up all your monthly income and all your monthly expenses. Which is bigger? How much is left of your income after expenses, or are you into minus numbers?
It's often the variable expenses that throw up the biggest surprise when you're assessing your current spending. You may think you're not spending much on buying sandwiches at lunchtime, for example, but you'd be surprised how much these small amounts add up over the month and year.
Drawing up your new budget
Now that you have all your income and expenses down in your spreadsheet, the budgeting can begin. This is simply a question of adjusting your allowance for each of the expenses according to your goals and jotting down a new figure alongside each expense that will be your budget for the month. Divide annual expenses by 12 to give you a monthly budget, even if you pay for it all in one go.
There are different approaches to budgeting, and the way you draw up yours will depend on the goals you outlined at the start. For example, one idea is the '50/30/20' rule, in which you allocate 50% of your income to things you need, 30% to things you want, and 20% to savings. However, if your goal is to save money, you might want to change these percentages to prioritise saving over buying things you want but don't need. If you're budgeting in order to throw more money at a particular hobby, you'll want to make cuts to other things so that you can allocate more budget to this.
It's easier to give yourself a smaller budget for the variable expenses, such as groceries, but if you're serious about saving then you can also find ways to reduce fixed expenses or eliminate some of them. For example, you can give yourself a lower utilities budget by switching energy supplier or asking for a cheaper tariff, and you can cut out expenditure on things you don't use, such as a gym membership.
In a sense, you've done the easy bit by drawing up your new budget. The difficult bit is sticking to it! Depending on your goals, there are a few practical steps you can take to enforce your new budget once it's in place, such as:
- Automate your savings - setting up a standing order to a savings account forces you to put aside savings each month
- Draw out cash - force yourself to stick to your weekly food budget by drawing it out in cash and only spending what you have in your purse or wallet
- Don't feel you have to spend up to the budgeted amount - if you have money left over in a budget category, consider it a bonus for your savings account or for a rainy day
- Get into new habits - enforce your budget by getting into new habits, such as meal planning if you're trying to cut spending on food.
Keep track of how your new budget is going so that you can make further adjustments as necessary at the end of each month. Alongside the 'Budget' column of your spreadsheet, add an extra column for 'Actual' to record how much of the budget you spent. If you wanted to be really clever, you could even put in a simple formula in another extra column to calculate the percentage over or under budget you were, so you can immediately see where you’re doing well or struggling to stick to budget.
Budgeting is a great exercise in managing your own finances, and you'd be surprised how much more in control you'll feel once you have a clear picture of what's happening with your money. Whatever your aims from starting a new budget, we hope this helps you achieve your financial goals.
Dave has worked in digital for 10 years in client-side, agency-side, and self-employed capacities. He now writes engaging content and creates innovative digital strategies for the financial services industry.