THE IMPORTANCE OF BUDGETING

The importance of budgeting

An article by StepChange Debt Charity

What is a budget?

A budget is a list of all the money you receive and all the things you spend money on every month.

Budgeting helps you to see where your money is going, so it’s easier to make sure that you’ve covered all of the things you need to pay. It also helps you set financial goals.

Whether it’s scribbled in a notepad or put into a spreadsheet, budgeting is an important life skill.

Lots of people struggle financially because they don’t plan their spending, or know what their income is. Planning how to use your money may help you:

How to make a budget

1. Get your financial information together

You’ll need to gather together all of your financial information including:

2. Calculate your income

Your income is the money you receive each month from any work you do, as well as from benefits, pensions, investments, or money from partners or relatives.

3. Calculate your regular spending

Look at what you spend every month in each of the following categories:

Tip: If you’re spending a lot of money every month on debt repayments and are struggling with your day-to-day expenses, you may need free, independent debt advice. Visit StepChange Debt Charity’s website www.stepchange.org for more information.

4. Don’t forget to budget for one-off expenses

One of the aims of creating a budget is to plan your spending thoroughly. Do you need to pay for a large one-off expense later in the year such as a car service, or a repair to your home? Make sure you add this to your budget.

You can do this by taking the amount you’ll need for the one-off expense, then dividing it by 12 and adding it your monthly budget. You then put this amount aside every month. Putting it in a savings account away from your day-to-day bank account can help you avoid dipping into it.

5. Check if you have a ‘surplus’ or ‘deficit’ budget

Once you’ve added together your monthly income, and taken away your outgoings – have you got money left over?

If you do, this is called a ‘surplus’. You should use this to pay towards any debts you might have, or add this to a savings account.

However, if you’re spending more than your total income each month you have what’s called a ‘deficit’ budget.

Spending more than you have coming in means that you’re at risk of getting into financial difficulties, especially if you’re using credit to pay for everyday living costs, or are dipping into your overdraft on a regular basis.

You may want to consider revisiting your budget to see if you can cut back in any areas. You should also consider getting free debt advice – using overdrafts and credit cards in this way is a danger sign of debt.

6. Put money aside

If your budget allows, you should put money aside each month into a savings account.

It’s a good idea to have one for larger, planned one-off purchases, and another for creating an ‘emergency fund’.

Having some ‘rainy day’ savings can help you avoid getting into debt if you have an income shock such as redundancy or illness.

7. Track your spending

It can be helpful to carry a small diary or use a budgeting app to keep track of your spending. It’s easy to forget small purchases, but they soon add up!

Tracking your spending helps you understand where your money goes, but it can also affect how you spend your money too. Writing down every penny you spend may make you less likely to splurge on something you don’t need.

Tip: Use cash not card. It’s very easy to lose track of your spending if you’re using your debit card, and especially if you’re using contactless payments.

8. Look for ways to save

In almost every budget there may be opportunities to save a little more money. Ask yourself if you could:

Making these reductions could free up valuable extra money to help you keep on top of your household bills or boost your savings.

9. Review your budget regularly

Once you’ve started to budget effectively, you should review your spending regularly. There’s no set time to do this, but it’s worth checking every few months.

During your review you should check: