How does budgeting work?
I’m not about to waste too much time telling you how to Budget but it can be broadly summed up as follows:
- Write down all your sources of income (or savings)
- List all your monthly expenditure, down to the last penny
- Work out the luxuries from the necessities.
- Work out your monthly surplus/deficit
- Then bin the unnecessary luxuries and attempt to trim the necessities if need be. (This gives you your planned spending going forwards i.e. your budget)
- Then keep track of all your spending to ensure you stay within budget
But trying to keep track of all the ins and outs and future cash flows from one account before calculating whether it means beans or steak for dinner every night until your next pay packet is time-consuming. Consequently, a lot of people either never try or simply give up.
Big picture budgeting - Step 1
The answer is to take a big picture approach. In reality your overall budget can be sub-divided in to mini-budgets. Each mini-budget will relate to a particular area of your expenditure. For example:
- Monthly Utility Bills (can be based on estimates from the utility companies)
- Travel Expenses
- Petrol Budget
- Food Budget
- Council Tax
- TV Licence
- Insurances (life, health, house etc)
- Credit cards/loans
- Personal Spending
Big picture budgeting - Step 2
What you then need to do is to determine the size of each mini-budget, while ensuring that their total sum equals your monthly ‘income’.
Going forward, these mini-budgets will have to be adhered to which is crucial to managing your finances. But how you do this is actually quite easy and leads on to my second money tip of the day – You can never have too many bank accounts.
We currently enjoy free banking in the UK. This means that it doesn’t cost you anything to set up a new bank account, and can be done with as little as an initial £1 deposit. So the next step is set up a number of bank accounts, one for each mini-budget if you so wish. Then ensure that you set up standing orders from your main current account so that your new mini-budget bank accounts are funded as soon as you get paid each month. For example, if you have budgeted £300 per month for your food budget, ensure that a standing order has been set up on your existing current account so that the day after you get paid £300 automatically is transferred to your new ‘Food Budget account’.
Big picture budgeting - Step 3
Next ensure that your monthly direct debits are altered so that they now come from the correct account. For example, make sure you change your electricity direct debit so that it now comes from your ‘monthly utility bill’ bank account rather than your current account, as it does now.
Now for your day-to-day expenditure just ensure that you pay using the correct account. It may mean that you have a number of debit cards but that’s hardly a chore especially if you cut up those belonging to non-spending accounts i.e. your Mortgage bank account. Plus by destroying these cards removes any temptation to dip into earmarked funds.
Admittedly the whole exercise takes a little bit of effort initially but once completed you can sit back relax and start enjoying yourself again because the constant budgeting worry has gone. I’ve been doing this for years and still do. What you have effectively done is sub-divided your spending so that you only need to keep tabs on the irregular items such as day-to-day spending. In reality your mortgage, utility bills, travel expenses, insurance bills don’t tend to vary from month to month. By ensuring that they are looked after automatically means that you have less things to keep track of which in turn means that you have to spend less time doing so.
The key to the success of big picture budgeting is to get the initial mini-budget estimates correct at outset. You can increase their accuracy by looking at your past bank statements and working out your historic spending patterns. But one tip I would give is to over-estimate just to be on the safe side. If you think you spend £120 a month on utilities, then budget for £130 or £140 if possible. It may mean that you have a smaller ‘personal spending budget’ but it will mean that you won’t get any nasty shocks when you get a larger than expected gas bill, as you will have plenty saved up to pay it. By slightly over-budgeting you will not only avoid nasty surprises but also be inadvertently saving. In time you can always review your budgets if you are consistently over-budgeting.
Another tip is to avoid overdrafts on your new accounts, perhaps with the exception of your Mortgage account (because if your work are late paying you at least your mortgage will be covered while you are waiting). Overdrafts just offer a temptation for debt. Also manage these account online and apply for paperless statements.
Going forward you just need to check the balances on each account to ensure that they are still running in credit and make any necessary tweaks to your figures. But this is a 10 second job rather than a laborious task. Also by combining the idea of ‘big picture’ budgeting along with opening a multiple bank accounts if you want to see if you can afford that pint after work you just simply check the balance on your ‘personal spending account’. But even better, a lot of banks offer daily balance text messages sent straight to your mobile each morning. This means that your budgeting can be reduced down to simply reading a couple of text messages.
(The eagle-eyed among you will have noticed that this post has been tagged as the 3rd part of our ''Lunchtime Money Makeover'' series. While the setting up of new bank accounts may be slightly laborious applying Big Picture budgeting to your finances can certainly be achieved at your desk in a lunchtime).