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What Is A Budget?

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Budgeting is a topic that many people do not like to talk about and has been seen in a negative way as something that people who are struggling with money use to get themselves out of debt.

The truth is, budgets are perfect for everyone! No matter if you are struggling to conquer a mountain of debt, save for a house, build a retirement fund or simply afford to pay for luxuries in life such as holidays or fancy cars.

Put simply a budget is an estimate of all the earnings and expenses that will affect your bank account over a given time-frame.

Most commonly budgets are done monthly as the majority of workers in the UK are paid a monthly salary.

The are many different types of budgeting that can be done, with our favourite being the zero-based budget.

When you know how much you earn each month (income) and how much you spend every month (expenses) it can quickly show you if you are living beyond your means – which usually leads to debt.

A good budget helps you to structure your expenses so that you can achieve your goals whilst not spending more than you earn.

How do you make a budget?

There are several key steps to take on the way to creating a robust and effective budget.

The first step in any budget is to understand how much money you have to play with. This means working out your monthly income. Check back over your last 6 months payslips to work out your average monthly income and record this number.

If you are on a fixed salary then this should be very simple to work out.

Next up you need to get an understanding of all the money you spend in a given month and all the money that you spend across a year. Many people forget about their seasonal/annual expenses when making their budget so you need to make sure you go back through enough months to makes sure that you do not miss out on any large seasonal costs.

This now leaves you in a position where you have your average monthly income and average money expenses.

Now you need to subtract what you spend per month from what you earn per month.

If you end up with a positive number then you are in a great position with a ‘budget surplus’ – This essentially means that you have some extra money every month that can be used to pay off debt or save for something big in the future like a holiday. My advice is to adopt a zero-based budget if in this position so you can ensure your surplus is put to good use for you.

If you end up with a negative number then you are left with a ‘budget deficit’ – This means that you are living beyond your means and you are likely accumulating more debt on a monthly basis (or eating into your savings if not already in debt). In this situation you need to look at your expenses and reduce or remove those that are not necessary, this can mean renegotiating utility bills, canceling subscriptions or eating out less during the month.

Adjust your budget accordingly to get yourself into a position where you will not overspend and then stick to your new budget.

The next thing to remember is that this is not a set-and-forget process. Make sure you track your spending during the month alongside your budget and tweak it over the first couple of months until you get the balance right.

Forward forecasting/planning

One of the major benefits of budgeting and one of the reasons I love it so much is that it allows you to better plan for the future.

With a budget in place I am better placed to judge when I will be debt free, when I can afford a holiday and most importantly it allows me to confidently spend my money during the month knowing that I am still saving and will have the money I need to those important times or expensive upcoming events such as Christmas.

A good budget can reduce your financial stress and take a big load of your mind by giving you back control of your finances.

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