Common Sense Personal Budget Planning

With many people struggling just to make ends meet it’s difficult to even think about opening a savings account.

But to get the maximum benefit from any rainy day fund it’s always better to start saving sooner rather than later and a good way to get going is to create, and stick to, a budget plan.

But how do you go about creating a budget plan? Below are 5 tips on how to get started…how you go about sticking to it is up to you!

1. Consider the year gone by and the year ahead.

When looking to start a budget for the forthcoming year (never just plan for the month ahead) you first need to look back at the year gone by to work out your biggest outgoings as well as identifying any mistakes you may have made. An easy way to go about this is to collect bank statements from the previous year as these should give a good overview of the last 12 months’ income and expenditure. The make a note of the outgoings that remain constant for the forthcoming year, for example, rent, utility bills etc.

When you have highlighted these expenses it is important to then plan for the ad hoc expenses for the year ahead, such as household repairs, birthdays and even vacations. For example, if you spend $1,000 on a vacation then this should be factored into your budget at a level of between $80 and $90 per month.

Once all of these outgoings have been factored in, they can be offset against your income to form the basis of your budget plan.

2. Get the details right

Many budget plans fail to work out because they don’t take account of the small, everyday expenses such as money spent on snacks, newspapers and other sundries. And whilst these things may seem inconsequential at the time, a couple of dollars here and there can really add up, for example, paying $2.00 for a coffee on the way to work each day will add up to around $500 over the course of the year.

Similarly, it is best to try and avoid putting too many variables into one category, for example, the costs incurred when running a car. If you simply put a certain amount of money aside each month to cover your car’s running costs, you need to make sure that this category covers every aspect of running that car including things like, petrol, car insurance, breakdown cover, services, repairs, MOTs and even things like car washing and anti-freeze for the winter.

3. Keep records and keep them in order

Keeping a record of your incomings and outgoings is the only way to keep on top of and ensure you adhere to your budget. It’s a good idea to set up a budgeting spread sheet as this will work out your disposable income and give you an at-a-glance overview of your income and expenditure.

If you don’t have the capabilities to keep a spreadsheet then the easiest way to keep a record is to keep the receipts from any purchases you make, including online purchases, and then at the end of each month record when and where your money has gone. In keeping a comprehensive list of all your outgoings you’ll be able to identify exactly where your money has gone, something that is particularly useful if you happen to fall short one month.

And whilst getting receipts for every purchase may seem a little over the top, this is common practice in business and there is no reason why you shouldn’t be as thorough with your personal finances as you would be with your business finances.

4. Make saving the norm

The basic idea of creating a personal budget plan is to ensure that you don’t fall into debt, or at least don’t fall further into debt, but the ultimate aim is to have enough money at the end of each month to put aside as savings.

That is why, wherever possible, you should factor in savings as part of your budget. And it doesn’t matter if you can only put a few dollars aside each month as even a small amount can adds up to a decent ‘rainy day’ fund.

Once you have decided on an amount that you can comfortably save each month then it’s a good idea to set up a direct payment from your bank account to your savings account as this will make sure that the money is being put aside each month.

It’s also important that you pick the right savings account that will yield the greatest return on your investment.

As it is coming towards the end of the financial year in the UK, many investors will be looking at taking out an ISA account over the next few months, that is the tax-free savings account that is the equivalent of the LSA, or Lifetime Savings Account in the US. The best thing about these accounts are the tax breaks that you are given, for example, if you open an LSA, you can contribute up to $7,500 to is every year and whatever money you put in is non-tax deductible and whatever returns you gain on the investment are tax-free.

The greatest advantage of this type of account is that you have the freedom to save for whatever you want as, unlike an Education Savings Account, it doesn’t necessarily have to go towards a college fund though it can do if you wish. In addition, you can roll any other savings accounts you may have, such as an Education Savings Account, into your LSA.

5. Give up your bad habits

This is potentially the hardest thing you’ll have to do when budgeting to save money but giving up some or all of your bad habits will make a massive difference to the amount of money you have available to put aside each month. The amount of money that can be saved by giving up smoking, drinking or gambling can be quite staggering…although giving up any of these habits is quite an undertaking!

Even just cutting down on these habits can ensure you save a fair amount of money, especially if this is done in tandem with other frugal living tips such as cutting out any unnecessary car journeys and cutting down on the amount of take away or eat-out meals you have.

And taking steps to cut out drinking or smoking as well as preparing your own meals and walking more often can have some positive health benefits as well as financial ones!

Of course, there are more steps that can be taken but if take these 5 steps as a starting point and make sure you stick to them then 2011 could be a financially sound year.

2 Replies to “Common Sense Personal Budget Planning”

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