PERSONAL BUDGETING TIPS
Money can't buy happiness, but it often allows you more freedom of choice. Though I focus on personal budgeting tips for beginners, I hope that the information will help anyone who is aiming to achieve long-term goals.
For example, you may want to:
- Pay off some debts
- Save for a major purchase like a house
- Save for a big event like a wedding
Or it may just be a question of wanting to get a grip on your finances. It's amazing how setting a budget and tracking your spending can bring a greater sense of control in your life.
Many personal budgeting skills have been around for hundreds of years. But in the 'old days', if you were one of the fortunate people to be well off, there were probably fewer temptations. For example, no credit cards or digital money transfers. Generally, you were limited to the cash in your pocket or in your bank account.
Today, we can still make use of the money management principles used by previous generations. In particular, you can learn a lot from the cash envelope system. In fact, some people find it really helps to go back to that way of doing things. But even if you prefer not to use cash, many of my personal budgeting tips for beginners are based on wisdom that is almost timeless.
It's about gaining better control over your spending habits. Making conscious decisions about where your money goes.
Top 10 Personal Budgeting Tips for Beginners
Here are some of the key principles that I cover in detail on the website:
- The number one principle for personal budgeting is not to overspend your income, unless you have already saved the extra money you need to cover the spending.
- This means you will have to build savings because, inevitably, there will be months when your spending does exceed your income, for example when you make a major purchase.
- It's important to build an emergency savings fund from which you can draw money to meet large unexpected bills.
- But mostly, it makes sense to plan in advance for major purchases. Once you have planned a purchase and estimated how much it will cost, you can build savings month by month so you have the money ready.
- You also need to plan if you have debts you want to repay, for example to clear any credit card balances.
- What this means is that in advance of each month, you create a budget. A budget is simply a plan (in more or less detail) about how you are going to allocate your income for the month.
- In your budget, you first estimate your income for the month. Then you decide how to allocate all of that income - whether to savings or debt repayments or day-to-day spending.
- Your day-to-day spending budget needs to cover necessary expenditure, but also fun and treats. It's for each of us to decide how much we're going to allocate to those extra goodies. Personal budgeting is personal. We each have our own priorities and goals.
- Once you have built an emergency fund, it's important to stop using credit for day-to-day spending or buying pretty much anything (except a house). If you buy on credit, it means you are overspending your income. (Remember, the first personal budgeting tip for beginners was not to overspend your income).
- During the month, record your spending as you go along. It's vital to track how you're doing against your budget. If you're anything like me, you'll find that it makes you more mindful of where the money goes. And it may well be that you think twice before making what might previously have been an 'impulse purchase'.
Why Do You Want to Set a Budget?
Pretty much no-one sets a budget just because they think they may enjoy the experience. Sure, the idea can grow on you in time - that sense of greater control over your life. But I'd say that out of all the personal budgeting tips for beginners, my number one is to identify the reason why you want to get a better grip on your finances.
Personal budgeting is a means to an end. It will take time and effort. So, why do you want to do it?
It doesn't matter what the reason is. What does matter is that the reason is important to you. Most likely you already have a good idea, otherwise you wouldn't be here. I'll be covering financial goals in more detail but, for now, make sure you have a goal in mind. Maybe it's to get rid of a money fear or pain, or perhaps you dream of a better financial future. Either way, what is it? Just a starting point...you can always tweak it when you know more - when you start to understand the power of budgeting.
How to Start a Budget - A Quick Overview
It's important to learn the principles of budgeting, but it's equally vital to know exactly what to do. My key aim is to give you practical advice you can follow. I'll be covering a lot of detail, but here's something you get going on for now.
The starting point for a budget is to gather information on your recent income and expenditure. You want to end up with a rough list of how you spent last month's income. The last three months is even better.
- Make a note of your income (after tax). If you have a fixed monthly salary, this should be a pretty easy task. However, if you have variable earnings (for example if you're self-employed), or if you get paid every week or two weeks, it's more tricky. Don't worry - I'll be covering this elsewhere on the website.
- Look through past bank statements (and any credit card statements) and make a note of your spending. I'll cover this in detail in the website. But it's important to analyse the spending into sensible categories. For example, 'food shopping' or 'car expenses'. You'll be using these same categories when it comes to setting your budgets
- Also, write a list of any automated payments, such as direct debits. If you don't know what any payments are for, make a note to find out. It's so easy to set up direct debits but then, after a year or two, to lose track of the detail. Particularly if you have a lot of them and if they are for various insurances.
- It might be that you don't have any records for some of the spending. You've made payments and you don't know what they're for. Okay, no judgement, that's water under the bridge. You just do your best with the information you do have.
- Also, do your best to split your spending between 'necessary spend' and 'treats'. For example, you need food to live, but eating out in a restaurant is usually a treat.
At this stage, you're just gathering information. But it's a major step forward. One of my key budgeting tips for beginners is to work on the detail - the truth about your finances. Particularly when you're looking at this for the first time.