The problem with most budgets is they don't work! They look at a typical month's spending, but what about the daily coffee, weekly shop and annual holiday?
In this guide
A budget done correctly is the most precise tool for analysing your finances imaginable. It answers two key questions...
Do I spend more than I earn?
An instinctive assessment is easy - if you're eating up your savings or building up debts, you're likely to be overspending. Yet before you can solve this it's important to get an accurate idea of the size and scale of the problem.
This is nothing new - Dickens' Mr Micawber laid out the principle pretty well in the 19th century:
Annual income twenty pounds, annual expenditure nineteen six, result happiness
Annual income twenty pounds, annual expenditure twenty pounds six, result misery.
Major overspending can lead to a debt spiral and severe problems, that's why the Budget Planners are all designed to definitively answer this problem and give you a real assessment of your finances.
What can I afford to spend?
Once you know where you're spending, you can start to alter and prioritise what you do with your money to enable you to stick within your means.
While the budget planners include tools to enable you to work out how to prioritise within your means, the real difficulty is sticking to it. The Piggybank Technique is designed to help you do just that.
What's different about this budgeting technique?
It's oft said "In debt? Do a budget!", "Skint? Draw up a budget!", "Wife run off with the milkman? BUDGET!" Yet while budgeting is seen as a panacea, unfortunately most budgets are bunkum.
The main problem is that because they concentrate on a typical month, they massively underestimate your real spend, as this misses huge costs such as Christmas, summer holidays, new sofas or even changing car every five years.
Broad categories like "motoring" make it too easy to forget the small expenditures that add up. Instead it needs be MOTs, new tyres, petrol, insurance, breakdown cover and more, hopefully the budget planners counter that by having nearly 100 separate categories.
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Free Budget Planner: assess your finances
Please read the tips for filling it out below before starting the planners.
There are three versions of the free budget planner tool; the big online financial analyser tool, or if you prefer and have Excel or Open Office there's a spreadsheet version, or even a good old fashioned print-out.
Part of a couple/family?
It's very important to be consistent when budgeting. First decide who you're filling it out for: is it just for you or is it for your partner/family too? Finances often can't be separated in which case you should sit down and do it together.
Not sure of the exact figures
It's tempting to try and fool yourself by underestimating your expenditure. This is a MoneySaving sin, and you will be punished. Try and be accurate and, if you're not sure, guess larger not smaller - that way you'll have cash left over and not be short.
Plus don't double-count!
Some types of spending overlap into different groups; be careful not to count expenditure twice. For example if you've included your car insurance in the motoring section, don't include it again under insurance.
Pay special attention to credit card repayments
The credit card section is designed for you to enter the cost of repaying your existing credit card debts. Don't confuse this with spending where you simply use your credit card and pay it off in full.
The best way to explain this is with an example. Say you spend £500 each month on food shopping that you pay for on your credit card but then pay off in full. This spending belongs in the food shopping column and not in the credit card column as, otherwise, you'll be counting it twice.
Don't include company pension contributions
Pension payments are included in the expenditure section; if you send a cheque or have a payment from your bank account each month to pay into your pension, include it there.
However, if your pension comes straight from your salary as a payroll payment, don't include it as, when you fill in the income section, you should just fill in the amount you receive after all deductions.
Treat holidays carefully
Remember that when you go on holiday, you'll have expenditure while you're away; but you also don't spend on the things you normally would. So you may want to reduce the amount you put in your holiday category by a little.
For example, say you normally spend £100 per week on food shopping and £30 on petrol. If you're abroad for the week, you won't spend this but you'll still be adding them in. Therefore if the holiday cost £700 and you spend £300 you may be tempted to put £1,000 in - but actually you're saving £130 of normal expenditure so it should only be £870.
MoneySave as you go!
It's always surprising to see quite how many different things you spend cash on. Worse still is how much money you truly spend on them. Yet there are always ways to save. It's worth considering that as you write them down - are you getting the best value for your money? Can you get them cheaper elsewhere? See the Money Makeover article for much more on this.
More Budget Planners
Doing the budget planner accurately should take about an hour. It's best if you gather together your bank and credit card statements first, preferably the last three months' worth. Between them it should list all standing orders, direct debits and give you an accurate idea of what you spend.
For example, for food shopping, gather together all your receipts for the last three months, add up all food spending listed, then divide by three to reach your average monthly spend.
If you can, also gather together your payslips to establish exactly what you earn plus any bills or other documents if possible (though your statements should also detail this info).
What the result really means...
Now we have a true picture of your income expenditure. Hopefully you've pressed the button at the end which tells you the real truth of your finances. Either you spend more than you earn or you earn more than you spend.
Well done you!
Providing you've been honest with yourself, it's time to relax a little - but MoneySaving doesn't stop there. In fact it's just beginning. Paying less for things means you have more money in your pocket to enjoy life more (and possibly save some for the future too!).
The typical savings from doing this can be £3,000 - £5,000 a year. My estimate is it'll take a full day's work but look at the return. It'll be the best paid work you've ever done. The whole site is dedicated to doing this in every area of your lifestyle, but to get started read the Money Makeover article.
Don't run the risk of a debt spiral - sort it now!
Spending more than you earn may not seem like a big deal, yet it's a potential disaster - and not just financially. At best you'll be eating away at your savings; at worst, you'll need to borrow.
And this type of borrowing is the worst as it means you can't afford your lifestyle and thus there's no planning to the debt and no end in sight. Sadly, I've seen this result in debt crisis too many times, and that doesn't just hit your pocket: it can hurt your home, family, mental health and relationship.
You may feel this is over-dramatising. But when there's no money left and you can't borrow more - and the creditors are asking for money back which you've no ability to repay - it touches every element of your life. This danger is what's called a 'debt spiral'. It works like this:
Many people fool themselves about this, a common thought is, "that doesn't happen to nice families like us". Well, I'm afraid even if you're middle class, you're not insulated from debt. In fact you're in the prime category for debt crisis. It's crucial to take the blinkers off.
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What to do if you've got an overspend...
There are a number of simple steps to go through to try and reduce it.
Step 1: Pain-free savings - cut bills without cutting back
This is about ensuring you live the same way but pay less to do so. It's pain-free as no lifestyle changes are needed.
Don't just look at the obvious things like credit cards, energy bills and mortgages. You can save on things like childcare, council tax and contact lenses too. To go through this in detail use the full step-by-step Money Makeover guide, which shows you how to look at everything.
Step 2: Reassess your finances incorporating the expected savings
Now, it's worth revisiting your budget planner, incorporating your new predicted expenditure based on the expected pain-free savings. What you do then depends on the result...
Now spending within your means? Congrats, no more change needed (unless you're saving up for something), but keep monitoring your finances. Effective budgeting is still worthwhile. See piggybanking.
Still spending more than you earn? Then it's time for step 3...
Step 3: Cutting back - painful savings
You need to spend less, do less and sell things until you are living within your means.
Easy lifestyle changes make huge differences, just check out TheDemotivator.co.uk to see the real impact of small spending. Cutting out a daily £2.50 coffee reduces your annual expenditure by £625/year. Add magazines, cigarettes, chocolate, parking and more, and savings mount rapidly.
Run through what don't you need
Ask yourself two questions for every aspect of your life...
Do I need it?
If I do, could I still satisfy the need to an extent more cheaply?
This may mean having the self-discipline to cut out cinema trips and expensive Christmas's, half-compromises like switching Sky for Freeview, or stopping costly holidays abroad in favour of holidaying at home.
See the stop spending guide for full help.
Don't be afraid to sell things
If you have assets but are income poor, then consider flogging things you don't use or need to get the books to balance. Of course it's a one-off, but hopefully you can use the money to repay debts or get your savings back together.
This may be selling things like a car or motorbike, working through your wardrobe and getting shot of old clothes (see the eBay sellers guide), or selling old mobiles (use mobilevaluer.com to get the best price). If you've got it and won't use it, consider flogging it.
Are your debts severe?
If things are so grave even this doesn't touch the side, it's likely you're in serious debt and need urgent guidance. Visit free non-profit debt crisis agencies like Citizens Advice Bureau, StepChange Debt Charity or National Debtline as soon as possible.
Piggybanking: The trick to sticking to a budget
Doing a budget on paper is easy, the difficult bit is sticking to it. That takes either strong discipline or a decent technique. We can't help you with the first, but Martin has a simple, but powerful technique to help you take control of your spending. It's called piggybanking.
There are two key facts you need to understand before you start to budget properly.
You can't trust your bank account
Your bank account lies. When you check it, it only shows you a simple snapshot of the scene that day. It misses out what payments are due in or out, when direct debits are paid, and when you need to go shopping. Never think that having cash in your bank account means your budget is balanced. But on the flipside, being overdrawn is definitely a good indicator that it isn't.
Don't ask "What's the cheapest way?" Ask "What can I afford?"
To get back on track, your finances must lead your lifestyle, not vice-versa. Many people look for the cheapest way to do something and consider that to be MoneySaving. Yet if you're overspending, it's more important to curtail that - meaning that you're spending within your means.
Let's clarify this with an example. People often get themselves into trouble at Christmas time by asking "how do I have a great time, with a big tree, all the family round for dinner and hi-tech pressies for all the kids on the cheap?"
This is a bad question. It establishes your priorities without reference to how much money you've got. The right question to ask is "What can I afford to spend this Christmas?", and then plan your activities around that.
The Piggybank Technique
The piggybanking technique helps you automate your spending so you constantly know how much money you can truly spend.
It's very easy to do, but let's break it down step-by-step just to make sure.
Select your main categories of spending
The aim is to have your books balancing - so you're not spending more than you earn. To do that, you need to work out how much you can spend on different areas of your life. You can use the "Part C - Monthly desired spend" column of the Budget Planner to do this.
Once that's done, you need to scan through to see what the major categories are. This could be holidays, wedding saving, Christmas, clothes, birthdays, hobbies or whatever you spend on. If you're self-employed, you should always have a tax account. Pick four or five at most.
Set up different bank accounts for different purposes
Now you know how much money you want to spend on different items, the aim is to make always knowing how much cash you have simple for you.
- To do this, set up a number of different bank accounts, each with money in it for a different purpose, so the money's effectively in little pots (almost as if you're putting them in different piggybanks).
You should always have a main bank account and a bills account. Then pick the biggest three or four of your main spending categories above for the others.
A simple example of five accounts:
Bills (including mortgage) Big purchases (sofa, car, kitchen) Holidays Christmas Savings & emergency fund
With the bills account, include all regular bills, whether monthly, quarterly or annual, which are paid either directly or by standing order or direct debit.
Use a standing order to feed the piggies
Now feed each of the piggybanks, including the bills account, which you should always overestimate slightly. Set up standing orders from your main current account to shift the right amount of cash each month.
As an example, if you allocated £800 a year to spend on Christmas (the typical amount for a UK family), you would put £67 a month into a Christmas account, so it builds over the year.
Tip: Schedule this for two days after getting paid, not for the same day - just to give you a little bit of room in case there are any payment problems.
Now your bank account(s) tell the truth
Now when you look in your main account, you know it really shows how much you have to spend, as all the money for bills and other key areas has been shifted out.
Plus if you see a £700 holiday, but there's only £400 in your holiday account, you now KNOW you can't afford it and can cut your cloth accordingly.
Piggybanking account suggestions
Your main current account
This is the centre of the whole strategy. So make sure it's a good one, and that you find its website or your nearest branch easy to use. Of course, ensure it's paying you well, too. See our full Best Bank Accounts guide.
Your bills piggybank account
It's usually best to use a current account for bills, as it's likely you pay most bills by direct debit - and most savings accounts don't allow that. So, if possible, ask your current bank if you can set up a second account.
If not, you need to find a current account that either doesn't require a minimum pay-in, or at least doesn't charge you if you don't pay in its suggested minimum (provided you still get basic features). Usability is more important here than any perks.
Interest here isn't that relevant, as the amount of cash you'll have in it should be relatively limited as money in bills accounts tends not to stay there too long once paid in.
Suggested accounts: Nationwide's FlexAccount* (always free but extra benefits if you pay in more than £750/mth) and Norwich & Peterborough's Gold Start current account (you must make at least five transactions in each calendar month, so make sure you pay enough bills). The Barclays Current Account is also fee-free and doesn't require a minimum amount paid in.
If you have an account you use for piggybanking that works well, please let us know.
For the other piggies, use savings accounts
For your other piggies, it's best to use savings accounts (or even a cash ISA), where you can earn some interest. By doing this you won't always be able to get your cash out at the same speed, but that isn't always a bad thing.
If you do need quick access to cash, then the easy option is to use an instant access savings account that's linked to your main bank account. This will allow you to sweep cash across when needed. Make sure it's available even if you've only £1 in it, and check how often you can withdraw your cash.
|Bank/building soc||Account Name||AER||Min balance||Withdrawal limits|
|Britannia||Select Access Saver||1.65%||£500||Four penalty-free/yr|
|Coventry BS||Post Save Easy Access||1.4%||£1||12 penalty-free/yr|
|Earl Shilton BS||Progress Account||1.4%||£100||Six penalty-free/yr|
|Yorkshire BS||Triple Access Saver||1.4%||£100||Three penalty-free/yr|
Remember to check once a year to see if your rate has dropped. If it has, ditch the accounts you opened, and switch to ones paying higher interest. For more savings options, see Top Savings Accounts.
Once you've piggybanked the cash you need for bills and other spending, it means whatever you've got left in your main bank account is actually spendable each month.
The other benefit is that you really know how much money you have to spend at Christmas or to go on your holiday - there's no fooling yourself anymore.
It's perfectly possible the end result of this is that you can't afford the holiday you wanted. But more importantly, it means if you follow it properly, you won't spend what you can't afford.