How to budget

Budgeting isn’t the same as saving money/spending less/economising. It can incorporate those things but at its heart budgeting is about understanding what comes in and what goes out of your bank account. Once you understand your finances, you can make moves to save money where appropriate.

If you’re running a household it helps to look at this jointly if you and your partner have separate accounts. My wife and I have a joint account which both our incomes are paid into and all our outgoings come from. Its just easier but I understand this might not be for everyone.

Fixed expenditure

The first thing to do is make a list of all your regular outgoings. The easiest way to do this is via your internet banking but if you don’t have this facility, going through a month or two of bank statements should help. Our list came out like this:

E.ON

TV LICENCE MBP

AVIVA

VEOLIA WATER CENTR

ST ALBANC DC

ALLIANCE LEICESTER

CIS F&A INSURANCE

VIRGIN MEDIA PYMTS

AA MEMBERSHIP

CAMELOT GROUP PLC

O2

T-MOBILE

I’ve left the totals out but you get the idea; every month we pay 12 standing orders/direct debits, the majority of which are fixed. With the aid of a calculator, you can easily work out exactly how much you know you will be spending in any given month.

Your first port of call should be to assess whether everything you pay for on direct debit and standing order is necessary and good value for money. Most of the time the payments go out and its easy to forget you’re paying as much as you are for something. As a result of going through ours, I changed by mobile phone contract and we’re now saving £25 a month on it. That’s £300 a year.

If your standing orders and direct debits are spread throughout the month, it may be worth contacting your service provider and asking to have the date moved. With the exception of the two mobile phone direct debits, all of ours go out in the first week of the month. That way I know that any money left in the account after the 8/9th of the month is there for living on and saving. Its easier that way.

How do you dispose of your disposable income?

Unless you’re paid an hourly rate or have regular performance or shift related bonuses, you should have a good idea of what your income is going to be every month. My employer pays me on the last working day of each month, so I know when I’m going to be paid too. If you’re like me, you can look at the list you just compiled of direct debits and standing orders and take it away from your monthly salary receipts. This is what you have left to live on and save with.

Understanding where your disposable income goes is perhaps the most important part of home budgeting. Working it out is time consuming and tedious but rewarding. The best way to do it is via bank statements and cheque stubs. A month is the bare minimum you should use but if you can go back three or four months, the information will be much more useful as it will contain semi regular expenditure- stuff like shoes, clothing, nights out and so on that might not happen all the time.

Practically the best way to do this is to take your bank statements month by month, cross out all the direct debits and standing orders you’ve already identified and then put all the remaining entries one by one into a cashbook (categories across the top, dates down the side). So for example, an excerpt might look like this:

	Petrol	Food	Clothes	Lunch money	Other	extra narrative
01-Jan	65
01-Jan		90
02-Jan				3
03-Jan				3
05-Jan					20	Pizza Express
	^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
	65	90	0	6	20

It may seem over the top to put each expense on a separate line with the date but often you’ll find you will spend more on certain things at a particular time of the month, so the more detail you have on your cashbook, the more use it will be for you.

Once you’ve prepared your analysis, you have the raw data to start looking at what you spend, when you spend it and whether you can do anything to improve what you do.

There might be lots of things to look at in your analysis.

Do you food shop weekly, or pop to the shops every few days as and when you need stuff? By adding up all your supermarket spending for the month and dividing it by the number of weeks in the month, you can get an idea of your average weekly spend on food. This and your petrol costs are likely to be your two biggest variable costs every month, and if that is the case, you can look into your analysis to see if there are ways to improve it.

If you shop weekly, and the bill looks high to you, does writing a list improve what you spend over the next month? Does switching from shopping in store (and being tempted by offers you might not have bought otherwise) to shopping online save you money? Because you have the historic analysis, going forward its much easier to see if any changes you’ve made have had a real impact.

What you should do is factor in the annual expenses that might not be captured by your analysis too. Things like your cars MOT, road fund license and insurance (if you don't pay by monthly direct debit) or paying for holidays and the like. If you can work out the annual cost of all these one offs, and divide the total by 12, that's how much you should be putting in a savings account each month (as a bare minimum) to cover these expenses. That way you wont be caught napping when you have to spend £200 taxing your car the month after you've paid the balance on your holiday.

It’s not really the aim of this piece to tell you how to make savings, once you’re armed with the information about your spending habits, it’s really up to you to see what you can alter. Good luck, and if you have any killer tips, please leave them in the comments section!