The big question, how to make a budget? Making a budget may seem like a daunting task, you may find out you have been spending thousands over the years on something that you never actually use, like a gym membership, or that Netflix account that you used twice, but it’s important to have a budget in place. Creating a budget that you can keep to over the long term has been linked to building wealth, while also helping many people get out of debt, including myself.
When I first made my budget, like I said in my previous post, Why Bother with a Budget, I already knew how much I was making per month, and how much my bills came to, but that still didn’t stop me over spending on luxuries. In short, I was spending money on things I wanted, without really checking to see if I could afford them.
Before we begin with how to make a budget, you must realise, it is important to be as realistic as possible, and to include every last expense, even that weekly can of RedBull. The end result, will show you how much you are spending each month, how much you have to spend on yourself, and how much you have to INVEST! After all, this blog is about investing. Even the most successful and wealthy people have created budgets.
One last tip, I have 2 current accounts, one is where my money is paid into (I am self-employed), the other is the account I pay myself my monthly spending money into. I will explain this later.
So, lets get into it, how to make a budget. Follow the steps below to begin with making a budget.
How to Make a Budget
Work out how much you earn each month
Work out how much you earn each month. You might be paid weekly, which can make this a little trickier. Just multiply your pay cheque by 52, to get the total for the year, then divide it by 12 to see how much you earn per month. Make a note of this for later.
Work out how much your bills are each month
Now, the way I did this was login to my banking app, and look at my direct debits and standing orders. Make a note of them all, and the date they come out, and total them up.
While doing this, it is worth checking to see if you are paying anything you shouldn’t be.
You should also include rent/mortgage, heating costs, electric, phone bills, internet bills, gym memberships, and anything else that comes out of your account each month, even fuel for your car. EVERYTHING that you HAVE to spend money on each month.
Example of How to Make a Budget (This is based on my expenses, apart from income)
1st – £650 – Rent
1st – £49.50 – Phone
11th – £37.50 – CloudScape Internet
20th – £39.92 – Car Insurance
£50 – Shopping
29th – £53 – Mac
Heating Oil – £50
Electric – £30
Car Fuel – £200
Work – £2000
Side Income – £500
Total Income: £2500
Left Over: £1340.58
How much have you left each month
Now that you have a figure for income, and bills, remember, every last thing that comes out of you account, you can work out how much spare cash each month. Taking the example above, you can see that there would be £1340.58 spare each month.
This is a nice amount, some people might have half this, some might have double this, it doesn’t really matter, as long as you are not spending more than you are earning at this point.
Get Out of Debt
Debt is a killer, and high interest rates make paying off credit cards even harder. I was in this position not so long ago, I had a credit card bill of £1k, paying the minimum off each month, and after doing this for 2 years, I realised I was getting nowhere, I was paying off £29, and being charged £13 interest, so really, each month, I was paying off £16.
At this rate, it was going to take me years to pay the fucker off. Plus, I kept adding to the credit card bill, as I seen it as free money basically, making it harder again to pay off! I had to do something! And I did.
After seeing how much free money I had each month after making a budget, I worked out the minimum I could get by on for the month, for things like going out, and my RedBull, I came to the figure of £100. I allowed my self £100 to spend for the month, the rest was set to paying off my credit card until it was gone!
I had another debt too, but the payments on it where a bit higher each month, so I paid it off after my credit card, I will explain why I did this, in this post, The Snowball Effect – Paying off Debt
Anyway, back to how to make a budget, the motto of the story here is, get the fuck out of debt, or you will never acquire any wealth, though you will be making the lenders wealthier than they already are!
This budget guide will help you get out of debt, and build wealth.
Do you have an emergency fund?
Yes, I see this all the time, emergency fund, emergency fund. Well, you need one, what happens if you are driving home some day, and the fly wheel shits it in your car, just like mine did. You’re buggered if you can’t afford to get it fixed. Or, what happens if you go to work someday, and the doors are closed? It has happened plenty of times before, a company goes bust overnight.
Do yourself a favour, save up 3 months worth of spending, this will be enough to get you through a hard time, or cover that unexpected expense, or even let you quit that job you hate, and not have to worry about not making money until you find the next job. 3 months!!!
Fuck, I couldn’t save that you might be thinking. Well, truth is, you should be able to, if you can’t, get another job! Lazy people will never make anything, you need to be driven, so if that means getting a second job to make more money, then do it! Even if its only an extra 5 hours a week. That could be an extra £141 a month, before tax.
One thing to note when creating an emergency fund, is, how much you will be spending each month in the event you loose your job. If I had to live off my emergency fund, savings, investing and any unnecessary spending would be paused until I get cash flow again. I would be living like a tight mofo, not driving anywhere I don’t need too, not buying anything I don’t need to survive…
50/30/20 Rule for Spending
Now that you have all your debts cleared, and an emergency fund in place, it is time to start building wealth and make proper use of your budget!
I work by the 50/30/20 budget, as I think it makes most sense.
20% of income is saved
30% of income is for personal spending money
50% of income is for household bills, fuel, heating costs, electric and any other monthly expense
You might be thinking; but some of my expenses are different each month, such as shopping. To combat this, I allow myself the maximum I would ever spend on shopping, so say I spend £100 a month average on shopping, I would budget £20 extra, to allow for those larger shops. If I have £20 left over from my shopping expense, I just leave it in my bills account, as I will use it at some other stage on shopping. Same goes with my overall budget, I will always allow myself a buffer of maybe £20, incase my phone bill is up a little, or I use some extra fuel.
Multiple Bank Accounts
I make use of 2 current accounts in my budget plan, and a few savings accounts. The reason for this is it gives me greater control over my finances.
Current Account 1
My earnings are paid into this account, and my direct debits, household expenses, rent and all other bills are paid out of this account.
Current Account 2
As I know how much money I can afford to spend each month on luxuries, because I have made a budget, I transfer this money to account 2, from account 1 on the last Friday of each month. I then spend only what I have in account 2.
I also have a credit card which I am using to help improve my credit score, my total spending on my credit card and monthly luxuries i.e. eating out, going out places, buying gadgets… will not exceed the figure in account 2, ever! I then pay off my credit card in full each month. Sometimes, I even have money left at the end of the month!
Make adjustments to your spending
Now that you have been introduced to the 50/30/20 budget, if you cannot make your expenses work to it, then you are living above your means, what I mean by this is that your rent is too much, your car payments are too expensive, you eat out too much… Fix this, have some control over your spending, and make it work with the 50/30/20 rule. This may mean downsizing house, buying a cheaper car, or whatever, but, if you can’t make this rule work, the chances of being able to build wealth are quite slim, and after all, you want to be financially free, right?
Change the date on direct debits
I have done this, all my payments come out around the last few days of the month, it just makes things a lot easier to manage, and you don’t have payments coming out all the time.
Now that you know how to make a budget, you should know how much you spend each month, therefore you should be able to get your finances in order, and really see how much you can save each month, and how much you can afford to spend on things you want.
You should really try your best to work to the 50/30/20 budget, and build some wealth. I will go into more detail on saving money, and the 50/30/20 rule in another post. I hope this post on how to make a budget will help you get started on your road to being financially free.