If your New Year’s resolutions are based around improving your finances, creating a realistic monthly budget is a great place to start and for many people is the foundation of good money-management.
Budget like a pro using the AOGF recommended technique of making small improvements. This can have a big impact over time and significantly improve your financial well-being.
Financial advisors often suggest allocating certain proportions of your budget to one of three main categories i.e. necessities, discretionary expenditure and savings, using the 50%/30%/20% rule for example, but, if most of your expenditure is used to pay for necessities, then this just isn’t realistic. Instead, start from where you are now and make small improvements.
Step 1: Review and Categorise.
The first step is to look at your actual spending over a certain time period – a year is a good starting point as it takes into account the seasonal variations including summer holidays and Christmas that can send the usual monthly budget into free-fall. This time period is also more likely to pick up one off expenses (dental check up; new glasses; speeding tickets etc.) that might otherwise slip your mind. Check that your outgoings for the year are less than your earnings. If this is not the case, you need to make some big savings quickly. I have given some ideas about where to find the biggest savings in the AOGF post 3 Step End-of-Year Personal Finance Review.
As long as you are spending less than you earn or receive from pension and/or investments, the next step is to categorise your spending. If you bank with Starling, this is done semi-automatically for you – you may just have to change some categories as you go about your daily spending, for example, if you pick up a sandwich in WHSmiths for example (my most likely stop if I don’t manage to bring a packed lunch to work) then Starling isn’t going to automatically categorise this as eating out. However, it’s straight-forward to manually alter this in the app. Other banks may have similar spending categorisation features. If you don’t have this feature with your bank, then go through your last year’s worth of bank statements and categorise your spending manually or using an online monthly budgeting planner such as this free budgeting tool from Money Helper. This can be fairly time-consuming, especially if you are doing this manually, so set aside a few hours for this process.
Step 2: Find Savings
By reviewing your actual annual expenditure, you are likely to identify some key areas that take a large proportion of your expenditure. For most people, housing and bills and transport account for the biggest proportion of expenditure. These areas can be difficult to modify without making big changes. However, you may identify another key category. If a surprisingly large proportion of your spending is on childcare, for example, could you change your working hours slightly in order to spend less on childcare (with the added bonus of having more time together as a family)? Find more ideas for childcare savings in Sustainable Parenting on a Budget; The School Years.
You may also realise that you are spending more than expected on certain discretionary categories and you may be motivated to cut expenditure in these areas. Do you spend more than you had thought on home entertainment, for example? Could you reduce your home entertainment subscriptions as actually you prefer to go out to watch movies with friends. Don’t be too strict here though or you will likely fail! A realistic budget is all about making small changes.
Keep a note of any key or discretionary savings that you could make, as this money can be diverted to paying off debt, saving or investing in the next step (see below).
Maintain your Monthly Budget in the Following Categories:
When looking for savings, be very cautious about planning to cut expenditure in a couple of categories:-
One area in which expenditure should not be cut, in my opinion, is the grocery budget; although you may have scope to reduce your grocery shopping, by buying less pre-prepared items for example, I would argue that any savings in this category should be diverted to fresh fruit and veg and healthy ingredients.
Similarly, don’t try to cut your energy bills by not heating – public health data clearly shows that cold houses can worsen respiratory conditions and arthritis and increase the risk of cardiac events, with younger and older members of the family being particularly vulnerable. You may however be able to offset an increase in energy bills by insulating more or using less electricity. Read more on this topic in Energy Saving Measures with the fastest payback time.
Step 3: Create your Monthly Budget
Next, work out a monthly budget for each item based on your actual annual expenditure rounded up to the nearest 5 pounds. If you can manage to stick to these budget amounts every month over the next year, you will automatically improve your finances without making major changes to your lifestyle, as, given that inflation is currently over 2%, by sticking to these figures, you are actually off-setting the effects of inflation on your expenditure.
Sticking to these budget figures will therefore take some effort. If contracts or services go up in price, see if you can reduce your usage of the item to compensate. For example, if mobile phone contracts go up in price, try to reduce your data usage (for example by downloading podcasts etc over Wifi before going on a journey or by using an old fashioned map for navigation) and make a mark in your calendar for the end of your contract. Then, when your contract is up for renewal, you may find that you have used much less data than you are actually paying for and that you can switch to a much cheaper contract.
Finally, aim to increase the money you have allocated in your budget to paying off debt using those savings identified in step 2 above. If you are debt free, increase the money you have allocated to savings. If you have sufficient savings, increase the money you have allocated to investments. If you are comfortable with your savings and investment rate, you may also be able to consider 1% for the planet.
Step 4: Conduct Regular Reviews
Review your expenditure regularly (I would suggest monthly if you are new to budgeting, or at least quarterly even if you are a budgeting pro who never overshoots) and check that you are within the allocated budget amount. Don’t forget that holiday expenditure is likely to be higher in the summer and gift expenditure is likely to be higher in the run up to Christmas, so you should be building up money in these pots throughout the year. If you bank with Starling (you can see I’m a fan!), then you can create saving spaces where you simply divert your monthly budget to a holiday or gifts space each month, so it’s not sitting in your main account with the temptation of dipping into that money before it’s needed.
If, at the end of the year, you’ve managed to stick to your budget and reduce debt or increase your savings, then choose yourself a well deserved reward! And repeat the process the following year.
The Art of Green Finance 
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