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The Budget Planner

How to manage your money

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Updated January 2018

Free budget planner

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?

This unique guide on how to budget counters that, and includes sophisticated free budget planner tools, which analyse your finances and then help you manage and control your cash.

Why should you budget?

Wilkins Micawber: A money saver before his timeA budget done correctly is the most precise tool for analysing your finances imaginable. It answers two key questions...

1. 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.

2. 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 often 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 solution, unfortunately most budgets are worthless.

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 getting a new car.

Broad categories like "motoring" make it too easy to forget the small expenditures that add up. Instead, "motoring" should cover MOTs, new tyres, petrol, insurance, breakdown cover and more, hopefully the budget planners counter that by having nearly 100 separate categories.

Watch the video guide

Courtesy of Five TV, 2009

Free budgeting tool: assess your finances

Note: Unfortunately, the big online version of the Budget Brain tool isn't working at the moment because it's currently under construction. However, you can use the same techniques outlined below with the spreadsheet and printout versions.

We originally developed this tool as we'd never seen a decent budget tool before that accurately captured the way people spend. Read the tips below to help you fill it in, then choose one of the two available versions of the tool: an Excel or Open Office version if you prefer spreadsheets, or a good old fashioned print-out.

Please read the tips for filling it out below before starting the planners.

Are you part of a couple/family?

Not sure of the exact figures?

Use a credit card?

Do you have a company pension?

How do you budget for holidays?

Doing the budget planner accurately should take a couple of hours. Don't let that put you off though, think of it as detective work and the chance for you to discover where those pennies are disappearing to. 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 (if you don't have them, look back through your bank statements) 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).

MoneySave as you go!
It's always surprising to see quite how many things you spend on. Worse still is how much you spend on them. Even though you may not like the end result, it's really important you're 100% honest when filling in your answers - remember it's better to guess larger than smaller to give yourself a bit of a buffer. And there are always ways to save. It's worth considering if you're getting the best value for money? Can you cut costs? The Money Makeover will help.

What your result really means...

Once you've pressed the button at the end which tells you the real truth of your finances, you'll have a crystal clear idea of your income expenditure. 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're eroding 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 relationships.

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:

How a debt spiral works: You spend more than you earn.  You borrow to fill the gap. More of your income goes towards repaying debts.  You kepp borrowing more to maintain your lifestyle. THE END RESULT..ALL YOUR INCOME GOES TOWARD REPAYING DEBT. YOU'VE NOTHING LEFT.

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.

Far too many people in work with good salaries have bigger debts. If your non-mortgage debts exceed half your after-tax salary, it's a real issue.

What to do if you've got an overspend...

There are a number of simple steps to go through to try and reduce the amount you're overspending.

Step 1: Pain-free savings - cut bills without cutting back

Avoid overspending by budget planning

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 your supermarket shopping too. To go through this in detail use the full step-by-step Money Makeover guide, which shows you how to look at everything.

Or you could try Bean*, which scans your accounts to find recurring costs - from overpriced bills to unused gym membership. It helps you find and switch to places where you could be spending less and helps you cancel any unwanted payments. Be aware if you use its service to switch, it doesn’t compare the whole of market, so you might not be getting the best possible deal.

If you sign up through this link*, you'll receive a £5 Amazon voucher 30 days after you complete all its sign-up stages - including attaching your bank account or credit card.

Bean is currently waiting to be authorised but says it would reimburse any users suffering fraud in the meantime. Check out our Open Banking guide to find out more.

Step 2: Rebudget with what you expect to save

Now, it's worth revisiting your budget planner, incorporating your new predicted expenditure based on the expected pain-free savings. What you do next 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: Painful savings - cutting back

You need to spend less, do less and sell things until you are living within your means.

  • Start small
    Easy lifestyle changes make huge differences, just check out 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 you don't need
    Ask yourself two questions for every aspect of your life...

    Do I need it? If I do, could I do it more cheaply?

    This may mean having the self-discipline to cut out cinema trips and expensive Christmases, 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're asset rich but 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). If you've got it and don't use it, consider flogging it.

  • Are your debts severe?
    If things are so grave even this doesn't touch the sides, 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 budgeting

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 method 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.

Budget bank account

1. 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.

2. 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 piggy bank technique The piggybanking technique helps you automate your spending so you always 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.

Step 1: 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.

Step 2: Set up several 'bills' accounts

Now you know how much money you want to spend on different items, the aim is to make it as simple as possible to know how much cash you have available.

  • 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 separate 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

    Step 3: Use a standing order to feed the piggies

    Now feed each of the piggybanks - including the bills account, which you should always overestimate slightly - from your main account. Set up standing orders 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.

    The result: 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 and convenient 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. Don't just take how much you pay for each bill at face value - you can try and reduce these spends by haggling. See our guide on haggling.

    Suggested accounts: Nationwide's FlexAccount* (always free but extra benefits if you pay in more than £750/mth). Barclays Current Account is also fee-free and doesn't require a minimum amount paid in.

    Of course, there are fee-paying accounts that are specifically designed to reward you if you use them to pay bills, like the Santander 123 Lite, which gives you between 1-3% cashback.

    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.

    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 and wind up in the debt spiral.

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