The Dreaded Budget...

One of the best things you can do to manage your money better is to put together a monthly budget. On the flip side, one of the biggest financial mistakes you can make (and I used to be this way) is live paycheck-to-paycheck with no real idea where the money is going. In the past, I would get paid and think "Great, I now have money to buy that thing I've had my eye on" and I'd suddenly be back to zero in my bank account, then some unexpected expenses would easily drag me into my overdraft.

Since I made a budget, I now have a good idea of how much spare money I have each month to spend on whatever I like. This means no guilt about spending the spare cash (this is after all, the whole point of money!) and a good feeling about saving (more on how much to spend and how much to save in a later post).

In the same way as adding up your Net Worth, it's important to add up all your expenses. These two exercises will be critical in applying the "Rules of Money" in a future post.

Here are some examples of my expenses (from roughly highest to lowest cost):

  • Rent/Mortgage
  • Food
  • Insurance (I combine house, car and breakdown insurance into one monthly figure)
  • Donation to Charity
  • Petrol
  • Electricity
  • Gas
  • Phone/Internet
  • Subscriptions (magazines, gym membership etc.)

Other costs may include:

  • Loan repayments
  • Credit Card repayments
  • Store card repayments
  • Road Tax
  • Health Insurance

For annual payments, I like to break them down as if I was paying them each month. I'm sure there's lots of things I've missed off this list, but my outgoings are fairly straightforward, partly as I don't have any debts.

Don't include any non-essentials like clothes (I'm assuming you already have a functional set of clothes and that any more are "luxuries" or for the latest fashion!), DVDs, books, TVs, gadgets etc. We will work out later how much spare cash we have to spend on these things.

Some things, like food, you will need to estimate or go through past statements to work out. Being a geek, I use only one card for my shopping so I can download the statements into a spreadsheet and extract all the spends in supermarkets to get an accurate idea of my monthly spend. If it helps you get a starting figure, for the past 12 months, I spent an average of £200 a month on supermarkets. This includes things like toiletries and the occasional DVD, but excludes things like petrol. I'm a single guy who eats good quality food that's high in protein, so there's lots of (relatively) expensive things like organic soy milk, low fat cheese and vegetarian frozen "meats" like Quorn and loads of frozen vegetables, but not much in the way of "luxury" foods like the various supermarket "Extra Special" range.

Once you have a list of all your expenses, like the previous exercise it's time to add them up. I like to have a spreadsheet with a column for "In" and a column for "Out". The "In" column in my case is simply the monthly salary I receive in my bank each month from my one job, but you should include any other sources of income.

Hopefully, but not necessarily, your "In" column will total more than your "Out" column...

Lastly, another important aspect of this exercise is to be honest with yourself. It's easy to pretend that you only spend £200 a month on food, when in reality it may be £300 or more. It's pointless to do a budget if it isn't going to be at least reasonably accurate (the odd £1 here and there won't matter, but the odd £100 or £1000 will).


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