Budgeting 101

It is January – payday is a few weeks away, you have partied all of December (#DettyDecember to my fellow Nigerians), and you are looking at your account balance wondering where your money went?

Guess what, you’re probably one of 16% of Britons likely to fall behind with their finances in January.

Every financial plan starts with budgeting. Wherever you are on the income-earning scale, you need to know exactly where your money is going.

Budgeting isn’t about restricting what you spend money on or cutting out the fun in your life. It’s about understanding how much money you have then planning how to allocate the funds.

The first step to budgeting is acknowledging your financial situation and deciding that it’s time for you to take charge of your money. There are a lot of tried and tested strategies you can learn to help manage your finances. Today I’ll be summarising in 7 easy steps 🙂

1. Understanding your expenses
The best way to do this is to keep track of all outgoings. Start as soon as you get paid. Keeping track shows a clear picture of exactly where your money goes monthly.

2. Understanding your income
Once you’ve tracked your monthly expenses, deduct it from your monthly income. If you end up with a positive figure WELL DONE (you could probably be saving more 😉 ). If it is a negative figure, then you need to adjust your expenses. It means you’re living beyond your means and digging yourself deeper into a debt cycle.

3. Create a budget
Creating a budget is easy – sticking to one is much more challenging. When you create a budget, you’re making a spending plan. It’s also important to be realistic. Know your fixed expenses – things like your rent/mortgage, council tax bill, gas and electric bill e.t.c would usually be in this category. Make enough allowance for flexible expenses, e.g. things like groceries and fuel, which tend to fluctuate in price.

When creating a budget, a general 50/30/20 rule applies– 50% of your income goes to your needs, 30% goes to your wants, and 20% goes to your savings. This can be adjusted to suit you. For example, if you’re still living with parents/family, why not increase your savings percentage?

There are many budgeting tools online you can access for free. My favourite one is this spreadsheet created by Martin Lewis of MoneySavingsExpert.com.

Successfully sticking to a budget is also usually the first step to getting out of debt.

4. Remove unnecessary expenses
UNSUBSCRIBE! UNSUBSCRIBE!! UNSUBSCRIBE!!!
That gym membership you’re paying for – when last did you go to the gym? Maybe try working out at home using free YouTube videos.

Are you buying tea and coffee daily? Save money by buying coffee beans/tea bags from a supermarket and leave it at your desk at work.

Instead of spending money buying packed lunches in your office canteen – why not try meal prepping at home. I saved £431.60 a year by making my meals.

You also need to check that you’re not overpaying for things like your electricity, phone bills or insurance. Comparison websites like Compare The Market and Uswitch help you save money by comparing a range of suppliers and showing you the best rates you can get for the same service. I switch electricity suppliers yearly, and I save an average of £80 – £100 annually. Making small changes like this add up to a significant improvement in your finances long term.

5. Understand your credit report
Did you know that bad credit markers can stay on your credit file for up to six years? There are a few websites where you can check your credit file for free. I use ClearScore – a few others are Experian and CreditKarma. Always make sure the information on your credit file is up to date and ensure there are no errors.

6. Consolidate your debt (if necessary)
Try combining your unsecured debts into one loan rather than paying them individually – this only works if you’re getting a better interest rate on the consolidated loan. The good thing about ClearScore is it gives you a timeline of your credit history. You can see what times you’ve had dips in your report. It also shows you who is more likely to approve your credit application by comparing a range of lenders without leaving a hard footprint on your file. If you’ve got a great credit file, you may have pre-approved offers – this shows lenders who will 100% accept your credit application.

If you cannot consolidate your debts, pay off higher-interest loans/credit cards first and work your way down until you’ve paid off your debt.

7. Increase your income
If you have any special skills or talents – it may be time to translate these into earnings. Remember, no idea is unique but how you execute is critical! Find what makes you differ from competitors.

If doing a 9 – 5 is more your thing, it may be time to negotiate a salary increase with your employer. Studies have shown that this is something women are less likely to do. You can upload your CV on Adzuna, and it shows how much people with the same skill set as you are earning.

Managing your money helps improves the quality of life. Budgeting can be challenging, but if a goal means something profound enough to you, you’ll do whatever it takes to reach it. 🙂

Do you have any money-saving tips? Please share with us in the comments.