contributed by Hannah of Debt Advisory Centre
Budgeting is something many of us would like to be better at, but it's something a lot of us don't get enough time to work on.
Your budget is the foundation of your finances, and budgeting is all about understanding this and controlling your money.
Creating a budget can be a great way to gain further control over your finances and can help you manage your money far more efficiently. To create your own budget, and take a step to gaining a stronger control over your finances, follow the simple steps listed in this guide:
- First of all, write down everything you earn (and receive in benefits, for example) each month. You should list each income source separately so you can see exactly where your money is coming from.
- Secondly, you'll need to write down everything you must spend each month. If you've got enough time, it may be worth taking a month to write your expenditure down (so you have an accurate amount), but if you can't wait this long, you'll have to rely on memory, receipts, bank statements, etc. Although this won't give you as accurate a total, it will save you time and help you get started on making any necessary changes more quickly.
- It's important that you only write down what you spend on your priority debts (mortgage/rent, household bills, etc.) and essential living costs. You will account for your other expenses (unsecured debts, etc.) later on.
- Now you've got both your income and essential expenditure written down, you'll need to total each of them up and subtract your expenditure from your income. This will leave you with your disposable income.
- Your disposable income is the amount of money you've got available to pay towards your unsecured debts (credit cards, unsecured loans, store cards, overdrafts, etc.) each month and, if you've got any left after doing so, to save and to spend on "luxury" purchases.
- Once you know the value of your disposable income, you can move into the final stage of budgeting: working out whether or not your disposable income is enough to cover your unsecured debt repayments. To do this, simply add up the monthly cost of your unsecured debt payments, and subtract it from your disposable income.
- If you're left with a negative number, you should take action immediately. The solution will depend on the severity of your problem. If you're a few pounds into the red each month, you might be able to cut back on some expenses to even things out. However, if you're quite far into the red, you may need to enter a debt solution like a debt management plan, for example. There are various organisations that can offer a debt repayment plan, but as with other debt solutions, there are several things you should bear in mind, including the impact it will have on your credit rating. The bottom line is, though, you're spending beyond your means and this needs to be sorted out as soon as possible before the problem gets worse.
- If you're left with a positive number, though, you could use the extra cash to "overpay" your debts each month (paying more than the required amount, in other words). This could save you a lot of money in interest and means you'll be debt free sooner!
So, there you have the guide to budgeting. You might want to revisit the budgeting process once a month, just to make sure you're always on top of things. It shouldn't take too long to do once you've created your initial budget.
For more advice on budgeting and on other ways you could improve your finances, you could seek professional debt advice.
This budgeting guide was provided by Debt Advisory Centre, a financial services company based in the UK.
