Creating a Budget

Budgeting your money is something that should be ever changing and not something that is set in stone. You can't know for sure what is going to happen in the future, but you can best prepare for it through following this method of budgeting.

There are 3 steps involved in my method of budgeting your money:

1. Create your Budget

2. The Strategy to Execute your Budget

3. Track Actual Spending and Review Budget

It is important to follow all of the steps to take control of your financial situation and continue to revisit, especially during the first few months of learning how to budget your money.

Step 1: Create your Budget

You will be allocating all of your monthly income to ensure that every pound has an intended use, otherwise known as a zero based budget. It is important to know that your budget is not set in stone and will need to be adjusted as necessary. Life is unpredictable even at the best of times. An advantage of budgeting is that when these unpredictable events occur you are prepared for them and can readjust your budget accordingly.

I have created a spreadsheet that I believe to be simple but effective in laying out your expenses that I use myself. This is available to download on google sheets using the button below. Of course you can create your own spreadsheet if this works better for you.

Budgeting Spreadsheet

The very first step to creating your budget is to enter your monthly income in the top left hand corner. By the end of creating your budget your monthly outgoings will match your monthly income to ensure that every pound has a job. If your monthly income varies from month to month, you should put down the minimum you expect to take home.

I have broken down my spreadsheet into four areas in which you will be directing your money to:

1. Fixed Costs - fixed sum of money that is guaranteed to come out of your account each month

2. Need - things that you absolutely must pay for each month (e.g. food) which can be considered as basic necessities

3. Want - all the things you spend money on that are not essential (e.g. eating out)

4. Invest - money to invest in assets to generate a return

To begin with you should fill out only your expenses related to your fixed costs each month. This is any money that is a fixed sum that guaranteed to come out each month such as rent, bills and any subscriptions.

Secondly, you should enter the costs related to your needs, which is the money used for the basic necessities. This will be things such as food, transport costs and even annual costs such as your car insurance.

You will notice that in the bottom half of your need and want columns there is a section for your yearly costs. This is because there are some of things we don't pay every month but rather at varying points throughout the year. For example, paying to have your car serviced or going on holiday. These are things that we should save up for throughout the year. This is so that when these costs come around we have the money to pay for them without being strapped for cash for the rest of the month or even worse having to borrow money to pay for them.

After allocating money for your fixed costs and needs you are left with an amount that you can direct to either invest or spend on your wants. In this case you have £624 for these two items. You can see this in the top left hand corner of the spreadsheet where it tell you how much you are either over or under budget.

You should be prioritising investing over money allocated to your wants to if you want give yourself the best chance of building wealth. I would aim to invest at least 20% of your income each month as a rough ballpark figure. This will very much depend on your circumstances to your ability to do this, with this being too difficult for some people and relatively easy for others. Start off investing as much as you can afford to and then over time as your ability to earn and budget your money improves you should be able to raise the proportion diverted to your investments.

"DO NOT SAVE WHAT IS LEFT AFTER SPENDING, BUT SPEND WHAT IS LEFT AFTER SAVING" - Warren Buffet

You should obviously not place so much emphasis on investing that you don't have a life and never see your friends for the fear of departing with your hard earned cash. However, there is a balance to be struck and it may help you realise when to go for cheaper options socially or when is not a good time to go on a shopping spree. For example, instead of going for an expensive meal out with friends you might decide to stay in and cook for them.

I would recommend giving yourself a slight buffer in your want column by giving yourself an amount for random spending.

After budgeting all of your money you should take a bit of time to review your plan and see if you can eliminate or reduce any of your expenses that are not worthwhile. Try to be as creative as possible and really think outside the box as to how you can do this.

You are now ready to move on to the strategy I have devised to help you stay on track with your budget throughout the month and secure your financial future.

Summary

Your overall aim is to essentially have an intended use for every pound you earn so that all of your money knows where it is going. Creating a budget is just the first step however. You need a strategy to execute your budget which I have covered in my next blog post in this series.

The strategy will help raise your financial awareness and keep you informed of the true impact of your financial decision making throughout the month. This will give you the opportunity to become more financially disciplined with your money, however it still requires effort on your part to control your spending. Overtime this gets easier and easier, especially as you begin to see your hard work paying off.

Click here to learn about the Strategy to Execute your Budget.