A basic budget is important for any household that isn’t rolling in more money than sense. I recently shared a quick guide to how I do it but I thought today I would share a bit more information to help you become financially frugal. After all, drawing up a budget is, in itself, easy enough. But how do you arrive at the total spend figures for each category without having to resort to guesswork? There’s no point allocating €50 for groceries if you’re currently spending €200.
The answer is tracking. You have to track your income and expenditure for a certain amount of time (ideally at least a month, but start with a week and see how you go) so that you can get a realistic idea of how much money is coming in and where it’s going.
The benefits of tracking before making a budget are twofold:
- You get a very clear picture of how much you’re spending, so that your budget can reflect your actual circumstances and not some rose-tinted view that refuses to accept how much you’re spending on Starbucks every day.
- You can see the areas that are draining your resources and where you could make cutbacks, if necessary.
And now to the how…
Basically, every time you spend money, you make a note of how much you spent and what you spent it on. You could use an app, collect and keep all your receipts, type into some form of digital note-taker, or just use good old fashioned pen and paper to jot down your expenses.
You then slot those expenses into different budget categories. These could include:
- Groceries
- Utilities
- Mortgage/rent
- Transport (petrol, car tax and insurance, bus fare, etc.)
- Household (toiletries, furnishings, etc.)
- Clothing, shoes and accessories
- Education (school/college fees, uniforms, books, etc.)
- Entertainment (movie rental, nights out, cinema tickets, etc.)
- Holidays
- On-the-go food and drink (coffee, snacks, lunches, etc.)
- Insurance
- Medical (doctor visits, medication, vitamins, etc.)
- Miscellaneous
Your categories might be different. Maybe you have other loan repayments, or gym memberships, or an expensive hobby. It’s up to you to decide how to divvy up your categories, but I would suggest separating out your necessities from your non-essentials. (That’s why I’ve listed ‘groceries’ and ‘on-the-go food and drink’ as two separate categories. Listing them together means you may think you’re paying €200 a week on something essential but, when broken down, you might realise that a large chunk of that is actually spent on coffee or quick snacks that you grab when you’re out and about.)
At the end of the time period, list all the income you’re certain of. If you’re paid irregularly, or differing amounts each time, take an average from the past few months and use that as your starting block. This is your cap in terms of what you can spend.
Now tot up each category to see how much you spent while you were doing your tracking. Use those figures to give you a realist idea of how much you’d normally spend in a given month. That’s your starting point for your budget.
Now add up all your categories and see how that tallies with what you’re earning. If you’ve still got money leftover to play around with, you’re doing well. Maybe consider adding the remaining amount to a savings account for a rainy day. And patting yourself on the back.
If your expenses outweigh your income, it’s time to go back over them. How much of a discrepancy is there? Because that’s how much you’ll have to cut. It should be pretty obvious from your tracking where all the non-essential money is going, so you may need to cut back on the odd takeaway for a while, or quit buying quite so many planners. *cough*
People often don’t realise how much they’re spending, and so end up wondering where their money is going every month. Tracking it is the only way to be sure, and I think you’ll be surprised by what you see. It’s the first step to drawing up a realistic budget for you and your family, and to finally getting your finances back on track.
Now all I have to do is convince myself that planners aren’t necessities…
