How to get your finances in order by budgeting

While things like budgeting and saving come naturally to some people, others regularly struggle to pay their bills on time.

And although those on low incomes clearly face unique challenges, the fact is that plenty of people on relatively high salaries experience financial stress too – now more than ever given the current cost-of-living crisis.

In part one of this three-part series, we explain how creating a budget is the first step towards getting your finances in order.

• Part two – how to manage debt
• Part three – establishing good financial habits

Understand your situation

The essential first step towards getting your finances in order is to get a clear picture of the situation. After all, you can’t fix a problem you don’t understand. If this feels like a daunting prospect, the good news is that it’s no more complicated than knowing what’s coming in and what’s going out. Or in other words, creating a budget.

If you’ve never created a budget before, you are far from alone. Many people find the word itself intimidating and imagine that it involves all kinds of complicated maths that makes their head hurt just to think about. In reality, this couldn’t be further from the truth.

Create a budget

The first thing to do is record your income. For most of us, this involves nothing more than making a note of our salary. But you might have other sources of income such as a pension or government payment. Add up any that apply to get your total.

Then it’s time to look at the other side of the balance sheet.

First there are your essential expenses. These are things like:

• Rent or mortgage repayments.
• Transport costs.
• Power and phone bills.
• Groceries.

In short, anything you can’t do without.

Minimum loan and/or credit card repayments belong in this category too. An easy way to find this information is by looking at your bank statements. So, if you’ve been avoiding doing that, now’s the time to rip the band-aid.

Don’t underestimate non-essential spending

When you’ve factored in both your income and essential expenses, what’s left are, well, non-essential expenses.

That’s stuff like:

• Streaming services.
• Gym memberships.
• Takeaways.
• Socialising.
• Hobbies.

It can be difficult to get a clear picture of this side of your outgoings as a lot of it won’t be regular, fixed amounts. Plus, it’s human nature to underestimate non-essential spending. For our purposes here, it’s best to play it safe and round up your best guess.

Once you’ve recorded all this information as accurately as possible, congratulations! You’ve just taken the first step towards regaining control of your finances.

Pro tip: the easiest way to record this information is with an online budget calculator.

Optimising your budget

Now that you have an accurate snapshot of your finances, you can start to make the necessary adjustments to regain control of them.

The most obvious place to look at making savings is your non-essential spending. Do you really need all those streaming services? Are you getting value out of that gym membership? Would losing your Friday night takeaway be the end of the world?

Unless you’re living like a monk already, it should be easy enough to spot some cost-cutting opportunities. One approach might be to make a list of all your non-essential expenses and put them in order of value you’re getting out of them.

So, for example, if you spend every night in front of the TV, you should probably get rid of the gym membership before the streaming services. If this were a health blog, we’d be giving you the opposite advice, but this is about getting your financial faeces together!

There should be some wiggle room in your essential expenses too. You can’t do anything about fixed costs like rent or mortgage payments but there are tips and tricks to reducing how much you spend on essentials like power bills and groceries.

In fact, it just so happens that we have a whole range of them on our Thrifty Thursdays page!

Build in an emergency fund

It’s important to be realistic though. While the best things in life are free, unexpected expenses certainly aren’t. For example, your car could break down or you might need to pay the dentist an urgent visit. That’s why it’s a wise move to build some sort of emergency fund into your budget.

What if you can’t make the numbers work?

The advice we’ve discussed so far is all well and good but if you simply can’t make your income outweigh your outgoings, then clearly a different approach is required.

This is especially true if you’re bogged down by debt, which is what we’ll be focussing on in the next part of this series.

Once we’ve discussed various strategies for tackling debt, the final part of the series will look at establishing (and sticking to) good financial habits so that you don’t feel the need to read articles like this ever again!