How to Set a Budget and Stick to it
Learning how to set a budget is a very important part of running a household and is something that many get wrong. Either people budget wrong and prioritize the wrong things, or they do not do it at all and have no control over their spending. Either way, you could definitely use a guide to help you budget your way to financial freedom and let the masters at Frugalalot teach you the art of budgeting.
Step One- How Much Money Do You Get?
The first part of budgeting is working out how much money you actually have to work with each month. Sadly, this step is not quite as simple as it may sound as there are a number of things that need to be considered.
The first thing to be considered is taxes. If you are employed by an employer, then taxes will normally be taken out of your wages before they are given to you before you receive your packet. However, this might not be the case and you should check with your employer to see if they do deduct tax before paying you. If you are self-employed then you can be sure that your tax is either taken before or after pay. Also, you should note that the first £12,500 is tax free so you might not even have to pay tax in the first place if you earn below that.
Secondly, for some people, like freelancers, their monthly income is not guaranteed and it changes from month to month. If you are in this situation, then Frugalalot would recommend this. Look at your lowest monthly income over the last 12 months and base it off of that. Then you can be sure that you are unlikely to earn under that amount and you are pretty sure that most months you will earn over it.
Step Two- Divide Up the Funds
After you have completed step one, you need to divide up the funds into the various areas. Here at Frugalalot, we like to use this system… 40, 20, 25, 15. Read below to find what each one means.
If you have not realized yet, the numbers represent percentages of your income and 40% is our first percentage. 40% represents how much of money you should allot to mandatory spending. Now, what we mean by mandatory spending is expenditure that you have to spend- such as: bills, food shopping and rent. All of these are mandatory spending so that you can carry on living the life you currently live. It is important that you separate mandatory spending from extras that you buy- things like clothes and online purchases.
Another 20% should be allotted to savings. Savings are an important part of setting a budget and will form the future of your financial life. Putting something into your savings account every month will help pay for any sudden costs that may come up in the future and it may help with trips like holidays and other fun things.
The next 25% can be spent on things that you want. This can be anything from watches, to nice clothes or some nice, new bedsheets- anything that is not essential spending but something you want can be bought with this money. Although, it is important to note that if you are to make this work then you will have needed to cut any and all unessential spending out of your mandatory mini budget- only then will this system work.
The final 15% is what we at Frugalalot like to call the flexible 15%. This 15% is earmarked for emergency spending such as taxis, repairs to your home or your car or any other emergency expenditure that you cannot plan for. In some cases, the emergency will require more than your 15% allotted expenditure- if that is the case, then you may need to borrow a little from your 20% savings. Also, you should bear in mind that if you encounter no emergency expenditure that month then you have an extra 155 to spend on whatever you want. Of course, Frugalalot condone any rash spending habit, but, in this case you have complete freedom over that amount of money.
Step Three- Keep Tabs on Your Spending
The third step in this process is to actually keep tabs on your spending so you know where you are in your home made budget. There are a number of different ways of doing this- some are listed below.
- You could use good old fashioned pen and paper to mark up your spending. Sometimes you just can’t beat the classics and this is no different. If you do choose this method then you have a couple of distinct advantages over more modern methods- the first is that you can have your records in physical form, something that you may find useful. Another bonus is that many online solutions to this problem require internet while a pen and paper does not.
- If you do not fancy the pen and paper approach, then there are a huge number of apps that are willing to solve this problem. Apps like Money will allow you to set a budget for a certain amount of time- say a month. It will then break that budget down further and show you your budget for the week and even for the day. You can also attribute all spending to different parts of your life and it will show this as a percentage of your total budget for that amount of time.
- A third way to measure your spending is via banking apps. The vast majority of banks now offer online banking as an option and if you think yours does not then you should definitely ask. These apps will track your transactions, as banks do, and will some may also divide up your payments into various categories. You can use this feature to track your spending.
Step Four- Actually Keeping with it
It is easy for us at Frugalalot to simple write this tips down, but it takes something else to actually follow them. That is why our step four is all about actually keeping with what you have set out for yourself.
We will not lie to you, for some people this will be very hard. The idea of limiting your spending is hard enough and for many spending the bulk of your money on bills and food is not appealing and does not lead to a life that looks good on Instagram and other forms of social media. Harder still is only spending 25% of your income on things you want, something that may be quite a jolt from normality for some. And even harder still is the concept that one fifth of everything you earn should be saved in a bank account- in 2017 6.5 million adults had no savings at all.
A good tip that we like to employ is a simple question. There is no exact question that we like to use, but, if you question yourself every time you buy something then it might stop a few unnecessary purchases. This is a great option for those purchases that you have to make right away- such as those decisions you have to make food shopping.
For decisions that you do not have to make on the spot, such as ones surrounding your 25% personal expenditure, Frugalalot recommend the 24-hour rule. The rule works like this, if you want to buy something then wait 24 hours before you actually buy it. If you still want it after those 24 hours then go for it, however, in many cases you may find yourself going off the idea and therefore cutting out unnecessary expenditure.
Step Five- But What if I Go Over?
But what if you go over? Have you failed the whole budget? Should you just give up entirely? The answers to these questions are all no, read below to find out why.
We understand that for many this will be a big change and this kind of stringent budgeting could be a big change even for people who are used to it. We have designed this budget so that there is always money left over if you do ever go over- the emergency 10%.
Also, it is important to remember that going over by a small amount will not result in any lasting damage. All it will mean is that you will not have as much money to spend on other things in that month. If you really wanted to stick tightly to the budget, then you could budget that overspend next month. What might be a problem is if you overspend significantly as this will have repercussions in the future.
If you have any questions about this, then just contact Frugalalot as we will gladly help you. Budgeting is something that is vital to the Frugalalot ways so understanding it is key.