Effective budget planning can help prevent you falling into debt or help you work your way out of the red and into the black.
By taking control of your income and outgoings and setting yourself realistic targets to work towards, you are able to better control your finances and anticipate your short and long term financial situations.
Here, we offer a few steps for successful and effective budget planning.
Get the Full Picture
It is important to determine how much your total outgoings and income amount to every month. Collect all documentation from the previous four months to determine your total spend and earnings over this period and estimate a monthly average. The required documentation can include:
- Bank statements
- Wage slips
- Credit card bills
- Household and utility bills
- Savings and pension contribution documentation
- Any other income documentation
Determine Your Household Income
Use the wage slips of all contributing members of the household to determine the total income. Make sure you factor in tax contributions to give yourself a more accurate idea of the total monthly income of the home. Include any benefits, dividends or income the household may receive. All of these amounts combined make up the total household income.
Measure Your Monthly Spend
Explore your financial outgoings over the previous four months by examining utility bills, household bills and bank statements. Record the regular and variable outgoings, marking each one as ‘necessary’ or ‘not necessary’. Necessary outgoings include, but are not limited to:
- Utility bills
- Mortgage/rent payments
- Food bills
- Child maintenance
- Personal loan repayments
- Credit card repayments
Add together your total outgoings and determine an average monthly spend of the household.
Compare Income and Outgoings
Subtract the average monthly spend from the monthly household income to determine your net spend. If the net spend is a negative number, then it is time to investigate the monthly spend – in particular the ‘not necessary’ expenditures.
Remove the ‘not necessary’ expenditures from your outgoings and subtract this from the monthly household income. If this is still a negative figure, it may be prudent to contact a financial adviser to help you explore the available debt management solutions options available to you and restructure your monthly payments. An InControl adviser can help develop a repayment plan better suited to your current financial situation.
If the new net spend is now a positive number, it demonstrates a need to have a tighter control over unnecessary and luxury purchases. The figures you have at your disposal will help you determine a more accurate monthly budget for luxury items.
Be Realistic
After determining the total outgoings and income of the household, you will be able to accurately develop a budget – but it is important to be realistic. Affording yourself the odd luxury (where the budget allows) will make it easier to stick to a budget in the long term.
Allow a little budget every month for unforeseen events such as breaking household items. This extra budget can help cover any unexpected outgoings which may occur.
Review
Review the budget four months after creating it to determine whether or not you are sticking faithfully to it and if it is helping to keep you out of debt. If you are struggling to keep to the budget, it may be preferable to draw a new one up afresh.
Repeat the review process until you are confident you are successfully sticking to it and seeing the benefit.
For expert advice about coping with debt, visit the InControl homepage or call our dedicated team on 0800 072 6623.