How I Budget

11 February 2020

"Money grows on the tree of persistence"

(Japanese proverb)

If you are anything like me, you will know that, without a budget, expenditure can quickly spiral out of control (think summer holidays or Christmas shopping!)

As I like to be organized, I use the same method every month to keep track of what I am spending. Firstly, I deal with all the essential bills, such as mortgage payments and utility bills. I make sure that all of my regular monthly bills are magically direct-debited out of my account at the beginning of each month, to coincide with when I get paid. I call these payments my 'fixed expenses' and they include things like my pension, mortgage, gas/electric and water, car payments and my utility bills. These do not include food, petrol or any expenses that could fluctuate from week to week.

I always make sure that I slightly overstate my fixed expenses and round each one up (rather than down - from say £158.20 to £160). By doing this, it means that your bank account will never go overdrawn and slowly builds up a little buffer to any unexpected expenses. So the first thing you need to do is make a list of these fixed expenses and arrange for them to be paid the day after you receive your money, which, for me, is monthly.

Make sure you include every item of expense you will have in a typical year, such as house insurance, membership fees etc. Don't worry if these include some annual expenses that you can't set up to pay each month. Just work out the monthly cost and set up your own savings account for this  monthly amount to be paid into. You can then draw money out of the savings account once a year, as soon as you need to pay these expenses.

As part of my fixed expenses, I always make sure I include an amount for savings, which I transfer to my savings account as soon as I get paid. At the end of the month, I also add to this account with any money left over,  before I start the process again the next month. These small savings can add up to quite a bit by the end of the year!

You should keep this fixed expense list to hand and cross out when payments have been made in a month, so you know at all times what you have still got left to pay. Add up the total, take it away from your income, and you will know how much money you have left each month for the second - more flexible - part of your budget.

I am currently using an envelope method of budgeting for any of my expenses that are not fixed. I have an envelope for petrol, one for food, one for entertainment and one for clothing. I allocate an amount of money to each one and withdraw the cash. I will only spend the money that is in the envelope and once it has gone I will not spend any more until the next month. The only exception to this is food and petrol envelopes where I only withdraw enough money for the week and put in the appropriate envelope. This is because if I withdraw a monthly amount, I will go and blow it buying whatever I think I need in the first week and then spend the rest of the month regretting it, staying in and being hungry! I will also switch money between envelopes for food and petrol when I need to 'borrow' if I need to. I don't do this with any other envelope.

I am hoping that this year will be the year of good habits and setting a budget is definitely a step in the right direction.

Happy saving everyone!