With an accurate budget, you’ll be able to make sure that all unnecessary expenses are cut out, saving you money, and avoiding running up big debts. If you already have debt problems, a budget will show you how much spare cash you have, helping you to talk to those you owe money to and make realistic offers on how you can pay them back.
‘Budgeting from the start allows you to manage your money in preference to falling behind on paying bills or using high interest credit cards and overdraft facilities just to buy household essentials,’ says David Rodger, managing director of UK charity the Debt Advice Foundation. ‘It also means you can plan for the expense of events that will mean a lot to you and your children – birthdays, Christmas and family holidays.’
So, how do you budget?
This entire process of budgeting won’t be fun, but you need to do it. ‘Commit to putting time aside to get this done and give yourself a deadline, otherwise it won’t happen!’ says Rodger. ‘Motivate yourself to budget by thinking of the things you want to be able to afford for your child; this should help you to focus.’
What you need to do to start with is get all your paperwork together and make sure you’re familiar with every element of your financial situation. ‘Set to work writing down everything you know about your finances – what money you have coming in and what you have going out,’ says Rodger. This includes whatever reduction in salary you’ll be dealing with if you’re on leave from work.
Look at what you spend: check recent bank statements, and bills for gas, electricity, telephone, council tax, water rates, insurance and similar expenses. Don’t forget to include anything you pay by standing order or Direct Debit monthly or yearly (such as mortgage or rent payments, loan/hire purchase repayments, and so on). Then estimate as realistically as you can what you spend on everyday items (for example, food, clothes, petrol, pet food and newspapers). Finally, include estimated amounts for unexpected and occasional costs, such as Christmas and birthday presents, car and household repairs, dentist and optician bills or holidays and outings. Work out the total outgoings for a full year and divide by 52 or 12 to get a figure for each week or month.
Next list all of your income. Check your payslips to get an accurate figure for wages. Look at statements for benefits and so on. Then average out any irregular income – ignore one-off or uncertain amounts. Once again, work out your total income for a week or a month.
Finally, take away the expenditure to work out whether you have any spare money, or whether you’re over-committed. (If you do have spare money, it might be an idea to save it – the next chapter has some advice about places to invest extra cash.)
It may sound obvious, but sometimes what’s staring you in the face can be overlooked. Look at your bank statement every month and assess where your money is going. Don’t rack up huge bills on credit cards or bank loans – the only expenses that are essential are food, utility bills, council tax, mortgage or rent.
Try to put a small amount away each week or month to help with expensive periods such as Christmas – this can make a real difference in the long-term. Having savings to fall back on should you need it will give you the peace of mind that in the event of redundancy, illness or a reduction in salary you can at least keep going in the short term until the situation improves. ‘Being sensible with money doesn’t sound like fun, but it can save a lot of sleepless nights,’ says Rodger.
Rodger recommends the budgeting tools on offer at the Debt Advice Foundation website (see Resources section at the back of the book), but there are plenty of other places you can seek guidance, such as the Citizens Advice Bureau. If you’ve not come across them before, they provide free, independent, confidential and impartial advice to everyone on their rights and responsibilities, particularly with regard to financial and legal issues. They offer services online (www.adviceguide.org.uk), by phone, and in person – check out http://www.citizensadvice.org.uk/index/getadvice.htm to search for your nearest bureau.
What to do if you find sticking to a budget difficult
If you’ve never had to budget before, the new routine may prove tricky. Don’t judge yourself too harshly, though. ‘It’s important to recognise that we have all have overspent at one time or another so you shouldn’t allow yourself to be too disheartened if this does happen occasionally,’ says Rodger.
Once it becomes a regular pattern, you need to take action – clearly your budget isn’t working and you’re going to find yourself in serious financial difficulties. If it’s temptation while shopping that you face, Rodger suggests making a list of essentials before you go shopping and sticking to it or adding any non-essentials you find yourself wanting to purchase to a wish list and then walking away to give yourself cooling-off time.
Make sure you review your financial situation regularly, and check that you’re getting your full benefits entitlement – billions of pounds go unclaimed every year because people assume they’re not entitled to anything.
‘The worst thing that can happen is for new parents to believe all is lost when it comes to budgeting,’ says Rodger. ‘It’s about going back to your numbers and working out how you are going to pay for that overspending – if it’s money you have borrowed, look around to see if you can reduce the interest if you can, for example by transferring a credit card or overdraft balance to a six months interest free offer – but beware of high interest rates after the six-month period.’
Common mistakes when budgeting
If your budget isn’t working, have a look at it again and find out why. Rodger highlights some common errors that people make, causing financial problems.
‘When you ask most people what they spend on food every month, they’ll usually tell you they spend around £80 at the supermarket, whilst totally ignoring the £5 they spent on milk, bread and eggs they bought from the local shop or the £2.50 sandwich they bought at work,’ says Rodger. ‘It’s the same with credit card bills – it’s not realistic to only think about the amount something costs and not the interest that will build up if you don’t pay off your card in full each month.’
Nobody comes in under budget every month – you’re always likely to overspend for one good reason or another, so give yourself a bit of leeway with your budget. ‘There always seems to be something extra we didn’t account for, such as a car repair bill – it’s important to build a bit of extra fat into your budget where possible,’ says Rodger. This can then cover events such as birthdays or anniversaries, which require gifts.
Although monthly income may exceed expenditure, if a couple of large household bills are due to come out the day before payday, it’s a recipe for disaster. Shift your direct debits around to ensure that there’s money in the account when it’s needed.
For some reason, people think that it’s more workable to cut back on their food and bills expenditure rather than stopping paying for things they don’t really need, like gym membership. That’s just ridiculous. Look again at your budget and see where you can stop paying for things you don’t really need.