How to Budget and Have Money Left for Savings
Always find yourself trying to make ends meet at the end of the month? Counting down the days until pay day? With a little forward planning, you can put this in the past and not only worry about whether you have enough money for the weekly shop, but also put some money into savings for a rainy day.
You've probably read many times that you should have an 'emergency fund' of 3 to 6 months expenses, but why?
The most extreme scenario where an emergency fund would be useful is if you lost your job. These savings would enable you to continue paying the mortgage, the bills and food whilst you looked for another job. With unemployment rates so high and the time it takes to apply and start a job, you need that financial safety blanket to keep your head above water.
Whilst I luckily, have never found myself in this situation, I have always had an emergency fund, and I have had times where I am grateful for it. I've had cars break down or been involved in an accident where my car is written off and the pay out would not cover the cost of buying a new car. Household appliances have failed that I am unable to live comfortably without (fridge, washing machine etc).
My most extreme (and risky) use of my emergency fund was to pay off the remainder of my student loan. When I saw I had a couple of months until the interest rate rose again and I had a little more than that in my emergency fund, I used the money to pay it off, leaving little more than £100 for emergencies.
If you ever use your emergency fund for any reason, you'll want to focus on building it back up again as fast as you can. You can never predict what the future may bring, and having an emergency fund helps to reduce your stress.
Incomings and Outgoings
Do you spend more than you earn? Or do you have no idea where your money goes? This is important knowledge for you to have when managing your finances.
Get a piece of paper or use a spreadsheet and write your basic monthly salary at the top. Do not include overtime or bonus payments in this figure; you should never rely on these payments.
Then write down what you pay out each month for different things, including:
- Utility bills
- TV Subscription services (e.g. Sky)
- Streaming services (e.g. Netflix, Spotify)
- Mobile and landline phone
- Insurance (car, life, health, home etc)
- Pension (if this isn't automatically deducted from your wages)
- Council tax
These are the items that should remain the same each month. If you can't tell what your mobile phone bill is each month because you keep going over your monthly allowance, look for a new deal. Even if you're still on contract, you can usually increase your deal for a little bit extra, but the extra you pay would be less than the amount you pay on top of your current deal.
Items to Budget For
There are a few things each month that you cannot write down exact amounts for. These include food, fuel and miscellaneous things, such as going out and shopping for clothes etc. For these you need to set a realistic budget.
For food budgeting, I suggest meal planning and using the receipts from previous shops to estimate how much you need to spend. Make a list of what you need to buy each week and stick to that list when you go to the supermarket. After you've done this for a month or so, you should be able to plan a full weeks shop without the need to go shopping during the week. You should also have a fairly accurate food budget.
For car fuel budgeting, use the internet or use the counter in your car to see how many miles you travel to work and back every day. Multiply this by how many days per week you work, then add on the mileage for anywhere else you travel each week. Add a few extra miles on for unexpected trips and you have a week's mileage. Multiply this by four to get a rough estimate of the number of miles you travel each month.
If you have a fairly modern car, it may display how many miles you have in each tank of fuel and you should know roughly how much it costs to fill the tank up. Work out how many tanks of fuel you need each month and multiply this number by the cost of a tank of fuel. This should be your monthly fuel budget.
If your car doesn't display the number of miles left in your tank, rest your mileage counter when you fill up and run the car until the fuel is very low. When you need to refuel, note the number of miles you have done on that one tank and use this to calculate how many tanks of fuel you need each month and the cost.
Write down other items you may spend your money on; going to the cinema, buying clothes, eating out etc. Try to estimate how much you spend on this and write this figure down.
Now add up your outgoings and the amounts you've budgeted for food, fuel and miscellaneous costs and subtract this figure from your total monthly earnings that you wrote on the top of the page (or spreadsheet).
Hopefully, you still have a little money remaining. If so, put a small amount aside as a contingency, in case you overspend. The rest should be put into a savings account. Putting the money into a separate account allows you to forget about it and prevents you from needlessly spending it. It may be helpful to set up a standing order each month to transfer this money into your savings account. This allows you to not even think about it and only spend what you have left over.
If you have a negative number at the end, you need to review your outgoings. Eliminate anything that isn't a necessity. For example, you can survive without Netflix and subscription TV; just watch the free channels and borrow DVD's from friends or the library. Can you cycle to work instead of drive and save fuel? Do you really need that gym membership, or could you buy some weights to use at home and go running outside for free? If you can't balance your incomings and outgoings, you need to be harsh and cut back. Even if you can only save a tiny amount each month, this will still come in handy later down the line.
Other ways of saving money could include buying discounted giftcards through work incentive schemes for places you would spend money anyway, such as supermarkets, using coupons you find online and getting cashback through cashback websites (I recommend Quidco - you can link your cards through this and earn cashback while spending in some high-street stores).
Finding the Best Place for your Money
As previously mentioned, putting your money in a separate account where you can't see it can take away the temptation to spend it. But you should also put it somewhere where it can grow.
Shop around to find the best interest rates for your money. Although there are faster ways to grow your money besides putting it into bank accounts, I would suggest that a bank is the best place to put your emergency fund. It's money you don't want to risk losing and even though interest rates at the moment are small, they are guaranteed.
For the best deals, and if you can commit saving a set amount each month, I would suggest looking at regular saver accounts. These tend to provide higher interest rates for the first year (then shop around again as the interest rate usually drops dramatically).
Getting extra money for nothing is a great bonus!