A budget is a plan listing expected expenditures and incomings over a set period of time such as, a month. There is one main objective of a budget which is to provide information that can help people take control over their finances, this information includes: what one can afford to spend on, repay or save, what their financial goals and priorities are and what actions they can take if they are overspending. It is a short term financial plan but over time it accumulates to become a long term financial plan called a cash flow.
A budget is composed of expenditure, income and the difference between the two, called the balance. Expenditure includes mandatory expenditure eg. council tax, essential expenditure eg. food and lastly discretionary expenditure eg. a luxury holiday. Income includes earned income eg. income from work, this can be on an employed or self employed basis, unearned income which includes any type of income which doesn’t come from work eg. benefits, loans. Furthermore, the budget balance is ones net financial situation, its calculated as follows: total income minus total expenditure. If this calculation equates to a zero the budget is balanced, similarly if the answer is a positive number than the budget is in surplus (income exceeds expenditure) on the other hand if the answer is a negative number than the budget is in deficit (expenditure exceeds income, in other words one is living beyond ones means).
Ways you can insure a budget surplus
- Cancel any subscriptions you’re not using eg. Netflix, amazon prime and so on.
- Cut back on discretionary spending eg. spend less on clothing. A good step to take would be to buy better quality goods so they’ll last longer, and better quality doesn’t necessarily mean more expensive. You could also start making your coffee at home which could save you around £400 each year. (source)
- Use cash so you can only spend a limited amount, this way you can avoid overspending .
- When shopping use a list you made beforehand to avoid impulsive purchases.
- Don’t auto renew insurance always check for better deals. And take advantage of no claims discount if available.
The 50/30/20 rule
-Don’t spend more than 50% of your earnings on needs.
-Don’t spend more than 30% of your earnings on wants.
-Save at least 20% of your earnings or more. Always save before you spend.
How a budget can help you
- Helps you take control over your finances. You consciously decide what your expenditures are going to be for the coming month so you only spend on what you have planed on thus, you are taking control over your expenditures, and reducing the likeliness of overspending and falling into debt.
- It can help with avoiding and spotting financial problems before they arise, therefore helping you avoid debt.
- Helps you achieve your financial goals. Creating a budget can help you cut costs hence increasing your savings which can help you achieve your financial goals and aspirations.
- Cutting on costs and saving money can also help you create an emergency fund which you can use if unfavourable events occur or as a cash cushion.
- Creating a budget can also help you clear your debts faster. This is because as you decrease expenditures you’ll have more money which you can use to pay back debts.
How you can create a budget
Creating a budget is pretty simple, all you need is a few statements and receipts and a spreadsheet which you can access online here or print one out if you prefer the paper form. Once you gathered all the resources you need, from here all you have to do is fill out the budget and you’re good to go. Make sure you keep a track of your progress, monitor your spending and stick to the budget to get a step closer to achieving your financial goals.
Check out my YouTube video about budgeting!
Financial Freedom 
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