Take care to maintain your budget sheets; add or remove costs as they occur, and keep paying off the payments on credit cards and other debts.
By: Louise Tillotson
No matter what your current financial situation, it’s worthwhile managing it carefully. Creating and maintaining a household budget may sound complicated, but it’s easy once you know how, and is a very good habit to have.
Why have a household budget in the first place?
We all have a steady amount of cash each week or month to spend, but it’s what you do with this cash that can make the difference between comfortable living and insolvency. A budget lays it all out in black and white and forces you to consider your finances, rather than just living hand-to-mouth or panicking if an unexpected expense comes up. It also tells you if you have any spare cash for luxury items, holidays or just money to go out for an occasional treat.
If you have a high amount of debt, a budget will be especially helpful as it will help you plan out how to pay off your debts and manage the money you have left over. The same applies if you’re on a lower income; you have less money to spend so you need to know that you don’t waste a single cent.
How do I set up abudget?
The first thing you need to do is keep track of your normal spending habits for one month. This means that everyone in the household should keep a ‘spending journal’ or keep hold of receipts for all their purchases. Track all bill payments, grocery shopping, even the odd cappuccino or candy bar you might buy throughout that month, and you’ll gain an accurate view of where your money is going.
Next, make a comprehensive list of all the regular payments you have to make each month. Start with the fixed amounts; rent or mortgage, utility and phone bills, childcare, insurance and anything else which requires you to pay the same amount each month. Then list things like your gas and grocery bills – it might be useful to compare a number of receipts from these to get an average amount.
Notice I haven’t mentioned listing any loan or credit card repayments yet? At this stage it’s worth obtaining copies of your credit report and score from the 3 companies holding it; Equifax, Experian and TransUnion (in the US) or CreditExpert (in the UK). They will give you an up-to-date picture of your financial standing as well as help you itemise your repayments. These need to go on a separate list, along with the interest rates attached to each of them, and the length of the repayment term if applicable.
Finally, itemise all the random purchases made in the last month. Consider each item; was it really necessary to buy this? If the answer is yes, perhaps you could add it to your grocery shopping instead. If not, then think about cheaper alternatives. The aim of this exercise is to free up some spare cash instead of frittering it away on non-essentials.
Maximizing your income while minimizing your expenditure
Look at ways you could boost the amount of money coming into the household. If you have older children living with you, do they contribute to the income? Do you or your husband have lots of free time which could be taken up with a part-time job? Perhaps home-working might help; several companies employ people to work from home doing various jobs. Check your local newspapers for vacancies and opportunities.
If boosting your income isn’t feasible, then try to reduce your spending. This is where itemizing everything comes in useful. You’ll be able to see how much cash you would have saved if you hadn’t bought them; this alone should be an incentive.
Now look at your first list, the one recording your fixed outgoings. Your utility supplier may not be the cheapest out there; you may be able to switch to a better rate with a different provider or even with your existing one. Changing your cell phone tariff is another way to release a bit of money each month. Little things like this can make all the difference.
You may have outgoings that occur on a quarterly, bi-annual or annual basis. If this is the case, work out the total cost per year and divide by 12 to get the monthly amount. Put this money aside each month as a regular expenditure and it won’t be such a sting when the time comes to pay it.
Look at your list of credit card and loan repayments (if any). Take notice of the interest rates and repayment periods. A high interest rate over a long time means you’ll pay back far more than on a low rate or a short term. Contact your creditors and obtain settlement figures for your loans; if the amount is low enough you may be able to pay the loan off in one go, freeing up more cash for other debts. For credit card repayments, it’s worth paying more than the minimum payment to avoid huge amounts of interest. If you find your credit card interest is very high, you might be able to save money by transferring the balance to a lower rate card. Only attempt this if your credit score is a good one; getting rejected for a credit card application can look bad on your credit report.
If you’re one of the lucky few with no outstanding debts, then investing your spare cash is perhaps the best thing to do right now. Paying into a private pension is something you’re probably already doing; can you increase your payments? If not, perhaps a high interest savings account (also called an ISA) can give you an excellent rate of return on your money if chosen carefully. Look for high rates of interest and a longer fixed term; your money will be worth much more if you take care not to withdraw before the term is up. Remember that any money paid into a pension, savings account or other investment should go on your ‘regular outgoings’ list.
That’s all the hard work done. Take care to maintain your budget sheets; add or remove costs as they occur, and keep paying off any repayments on debts. If you’re computer savvy, or have a family member who is, put your list into a spreadsheet and use the formulas to keep running totals. This way, you’ll always be able to see at a glance what your financial situation is.
About the Author:
Louise Tillotson is adebt author for UK price comparison site moneysupermarket.com.
Photo: Tax Credit