Many people let their money control them and tell them what to do. They do not have a plan for their money and each month it gets up and leaves. It walks out the door and they have no idea where it’s gone.

I may be exaggerating slightly but you get my point, to manage your money better you need to learn how to budget and take control of your finances. It’s something we should have been taught us school.

How to create a budget that keeps you out of debt

No such thing as a “Perfect month”

When you sit down to do your budget you need to realize that there is no such thing as a perfect month. You need to create a new budget every month before the start of the month. For example, if you get paid on the 26th of the month, you should complete your budget by the 25th. Generally, no two mouths are the same. One month you may have birthday presents to buy and the following month your car may need to be serviced. Therefore each month requires a unique budget.

The average family is burdened with a lot of debt and financial stress because they have; mortgages, credit cards, car finance or car leases, student loans, and many other forms of debt.

What most of these average families do not have is a proper budget. I am a big advocate for budgets and I believe that everyone needs a budget.

It does not matter if you are poor, middle-class, or rich and upper-class, if you do not currently do a budget when you start budgeting it will change your life.

Some people think of budgets being for people with little to no money and living month to month. In other words, broke. Some other people feel that budgets are like diets and are too restrictive. How wrong they are!

The advantages of creating a budget.

• Budgets help you to manage your money better because it is a plan of you telling every single pound where it needs to go and how it will be spent.
• Budgets help you to keep an eye on your monthly income as well as your monthly expenses. Most people stumble their way into debt and don’t plan their way deeper into debt.
• Budgets help people to achieve very specific financial goals, make more money, pay off debt, save more money, invest more money, gain financial independence, retire early, and more.

Budgets are for everyone

Whether you make a below-average income, average income ($28,000 according to the ONS), or above-average income, you should have a budget. I read an article in The Guardian that was about tax changes but highlighted the fact that “normal” families cannot save money. One family, in particular, earning $100,000 were unable to save any money each month. I cannot understand how a family with a household income in the six-figure range struggles to save any money. The full details are not disclosed but 2 things spring to mind; lack of a budget and lifestyle inflation (aka lifestyle creep). This is when your living standards increase in line with your pay rises. So you get paid more but don’t see the benefit or feel any wealthier because you spend it all.

This emphasizes my earlier point, that more people need to do a budget.

Doing a budget may not fill you with excitement, but it is a necessity to get better control of your finances, get on the same page as your partner, reduce your stress levels, and fulfilling your financial dreams.

Offline or online budget?

We all have preferences as to whether we like to use an old-fashioned pen and piece of paper, electronic spreadsheet, or mobile application (App).

I’m a bit old school and prefer to do my budget using a pen and paper with my wife.

You can use Microsoft Excel spreadsheets or a budgeting App. It doesn’t matter what you use, just get it done.

Your budget must be realistic and possible to stick to, there is no point in setting an unrealistic budget for yourself only for you to find it impossible to implement. To get a good understanding of your budget maybe for the next month you need to make a list of transactions and monthly outgoings from the previous month to give a good foundation for the budget for the coming month. You also need to take into account any expected spending specific to the coming month, like a birthday. When you pull together a list of transactions, you may shock yourself with what you find and realize that you are a secret spender. Hopefully, this shock will encourage you to be more prudent with your spending when realizing where your money is going.

Zero-based budget and variable income budget

There are 2 types of budgets but the most common is the zero-based budget because most people have a fixed income. As the example table above shows, a zero-based budget lists all the expenses and the fixed income. The total of the expenses is taken from the total fixed income. The remaining amount should always be positive otherwise you will be spending more than you make as an income. Only the Members of Parliament can get away with having a budget deficit without repercussion.

The variable income budget is very similar to the zero-based budget. You take your lowest expected monthly income as a basis. So for example, if you usually average $2,500 as an income, but the lowest can be $1,500 you start with this amount. List your most important expenses first which are usually the necessities of life. Food, shelter, utilities, transportation, and clothing are the bills that you should pay first. Using the example above, you could cover food to gas but would need to make more income (+$500) that month to cover the other expenses to avoid a deficit.

 Hold monthly budget committee meetings with your partner.

If you are single, then you can skip this step. If you are married or live with your partner you need to discuss the budget with them. Both parties involved need to be in agreement and “buy in” to the plan. The first few months after you start doing a budget together, you can expect to have arguments about how much money goes into each category. You will most likely get some of the amounts you put into each category wrong too, but you can fine-tune this in the following months.

If you need to make changes, call the emergency budget committee meeting.

If you need to make a change to the budget mid-month because you have an unexpected expense. You need to call an emergency budget committee meeting to get your partner’s agreement.

Final Thought!

The key to fully utilizing a budget is ensuring that you are living on less than you make. As long as you keep it simple and make it a regular habit to hold a budget meeting, you should be able to start winning with money. Spending less than you earn is a cornerstone to financial success and a budget is essential to having a plan.