How to Budget Effectively
Budgeting is a key part of getting yourself free from Debt. If done properly, and believe me it can be tough, you can gradually pay off your outstanding credit while maintaining a ‘normal’ lifestyle.
Many times, spending can spiral out of control because you are unaware what monthly disposable income you have to hand. Budgeting is key to understanding exactly what you have, and what you will need to pay off during that month.
How to calculate your budget
This is best done on a monthly, or weekly basis as spending can fluctuate throughout the year, say for example more expenses during christmas time, summer, etc. I personally find it easiest to work on weekly figures, so calculate your income (’take home’) ater tax, and divide by 4 to give you a weekly budget. Say for example you earn £1,000 per month after tax, you have £250 per week available.
Calculate your outgoings, which can be broken down into bills: which includes credit card bills, mortage or rent, utilities, council tax, road tax etc. Then add up the additional weekly spend on food, shopping, mobile phone contracts, internet or anything else that will cost you money during that week. This will give a rough idea of where you are in terms of a weekly or monthly spend. Be sure you are honest here, if you buy lunch at work everyday, make sure you include it, you will confuse your finances if you leave anything out.
If your weekly spend exceeds your earnings:
If your budget exceeds your earnings, you are in trouble, you are living beyond your means. Every week you continue this trend, you are getting yourself further into debt. Take a step back, and look trhough your finances again. What expenses can you cut back on? Are there any unneccesary costs listed?
Things like alcohol, or clothes could be cut back whilst you get your finances back on track - you will probably have to make some sacrifices to deal with the overspend. Food shopping could be made cheaper by buying food from markets, which are notoriously cheaper than supermarkets. Could you switch utility providers for a better deal? Would you receive better car insurance premiums if you switched? All these questions may apply to your situation, so you will need to assess the key costs and try to tackle them.
What if your weekly spend is less than your earnings:
If you are spending less than you earn, you are doing extremely well, and are on the way to being free from debt. Put thast additional money into a high interest savings account, a cash ISA and make that money earn you interest. Alternatively, a a more sensible option would be to pay off some of your additional balance on credit cards or loans (if you are not charged for making over payments). This also effectively saves you money by cutting down your interest payments.
If you are able to save, then well done on budgeting correctly, but always keep your budgets up to date and ensure you are not overspending in any areas. The more on top of your finances you become, the better equipped you are to deal with any unforeseeable costs in the near future. Sticking to a budget may be tough, but is a surefire way to help manage and reduce your debt.
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