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New Year’s Resolution: Create a Budget

New Year’s Resolution: Create a Budget
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When most people think of a New Year’s resolution, they probably opt for things like getting fit, spending more time with family and friends, or taking up a new hobby. Creating and sticking to a budget probably isn’t the most thrilling resolution, but it might be something that you need to do this year. 

We’re all starting to feel the pinch, with the cost of living on the rise. So, alongside any other resolutions you might have, why not create a budget for the coming year? It could really make you consider how you manage your money, and be hugely beneficial in the long run.

How to Create a Budget

A budget can help you feel more in control of your finances, not to mention make it easier to save up for those bigger expenses! So how do you go about creating a budget? We’ve listed the five main steps below:

1. Work Out Your Income

Do you know exactly how much you earn each month? What about your household income? For some people, calculating their income is simple, but for others, it can get a little more complicated. If you have more than one source of income, such as a second job or any benefits, these will need to be taken into account. Anyone else who is earning and contributes to the household expenses will also need to be considered.

Self-employed individuals will probably have the most trouble working out their average monthly income, especially if they mostly get seasonal work. This can mean their income drastically changes from month to month. For these people, it may be best to create an annual budget, setting aside money for the leaner months.

2. Track Your Spending

Once you have worked out your income, you can figure out where this money is going. Start by listing your main expenses, such as your housing costs, utilities and car payments. Then go through your variable expenses, like your groceries, fuel, and entertainment. You can work out an average of how much you spend on each category by looking at your bank statements.

Your variable expenses will be where you’re able to cut back and save money. For instance, there could be subscriptions you no longer use, or you could spend less on eating out and takeaways. 

3. Set Realistic Goals

The next step is to come up with realistic financial goals. These should be both short and long term goals – the former may include reducing credit card debt over a few years, while the latter could be things like saving for your retirement. 

Having goals makes it much easier to stick to a budget, as we tend to be more motivated if we’re working towards something specific. For example, you’d probably be happier to cut back on spending if you’re saving up for a holiday. Your goals can change over time of course, as long as you are aiming towards something you want.

4. Make a Plan

After deciding on your goals, it’s time to plan out how you’re going to save money. Look at your expenditure figures, and work out roughly how much you spend each month. Then compare that to your income, and the amount you’re looking to set aside on a regular basis. Setting spending limits for each of your categories can be a good idea, as can cutting some things out entirely.

If you’re unsure where to start, it’s often helpful to split your expenses into wants and needs. Priority expenses like your housing costs are necessary, while you probably only want to keep your monthly music subscription.

5. Review Your Budget Regularly

Creating a budget is important, but if you don’t review it regularly, you’re unlikely to stick to it. You need to ensure that you’re staying on track, and make adjustments when necessary. Few things on your budget will be set in stone, so can be shuffled around to better suit your needs.

And remember that your needs may change – your expenses may get higher, or you might reach your goal and need to start a new one. Your income could also increase if you get a raise or a new job, which may allow for more flexibility in your budget.

Tips Before You Start

Before you start creating your budget, there are a few things you may want to consider. We’ve looked at a few tips to help you stick to your budget below:

1. Use Hard Data

You may be tempted to just estimate how much money you spend in certain areas. But if you guess wrong, your budget is probably doomed to fail! A successful budget relies on accurate information in terms of your income and expenses, so make sure you use hard data when doing your calculations. This could be looking at receipts, bills, and bank statements, tracking quarterly expenses and well as monthly ones.

2. Don’t Include Things Twice

When you put your expenses into different categories, it’s important to keep track of what you’ve recorded. Otherwise you may end up omitting certain costs, or including some things twice. For example, you may put your car insurance in the transport section, and then include it in your insurance section too. Check everything over carefully when you’re done, so you don’t make these kinds of mistakes!

3. Consider One-Off Spending 

Not all expenses come monthly. You also need to consider big, one-off costs, such as going on holiday, paying for Christmas presents, or your MOT. And if you’re hoping to save up for something like a new car, that will need to be included in your budget too.

4. Decide Who the Budget is For

While you may primarily wish to create a budget for yourself, it can often be hard to separate your expenses from those of the household. You may therefore need to create a budget for your family or household, sitting down together to ensure it’s as accurate as possible.

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