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How To Manage A Budget To Avoid Debt

Creating and sticking to a budget is a really good way of keeping on top of your finances. Having a budget means you’re less likely to go into debt, but if you are in a tricky financial situation it’s also a great way to plot a path out. Here we take a look at some ways to do it.

Comings and goings

Before you decide how you’re going to budget more effectively you need to pin down exactly how much money you have coming in and how much is going out. This will take a little time and effort and will need the input of everyone involved in the financial upkeep of a household. 

To get an accurate idea of how much you spend each month, you’ll need to gather together bank statements and receipts going back at least three months. Once you’ve done this, list each area of expenditure such as utilities, food, entertainment, mortgage and so on. For expenses that vary, such as food, add up the total and divide by three for a monthly average. 

Also note down what other expenses come up periodically, such as Christmas, a car service and holidays, divide them by 12 to get a cost per month. Now compare all your monthly costs to your household’s net income (that’s the money that goes into your account after tax is accounted for) to see if you’re spending too much.
There are lots of good budgeting tools and household budget planners available to help you do this.   

 

Making the most of easy wins

Whether you’re overspending or would like to save more money, if you haven’t budgeted before there are usually some simple actions you can take that will have an immediate impact. 

If you haven’t switched your utility provider for years you won’t be getting the best deal. To start the ball rolling on connecting to cheaper energy deals. Providers want your business so they make the switching process as simple as it can be. Equally, check if you’re getting the best deal possible for your phone and broadband.

Go through your direct debits with a fine tooth comb to check whether there are any that you pay for but don’t use anymore. For example, we waste an average of £39 a month on unused gym memberships.

Finally, make sure you’re getting all the financial assistance you’re entitled to including child benefit, tax free childcare (which can apply to holiday clubs too) and working tax credit.  

 

Address your debt

For many people, their largest debt is a mortgage. It’s worth checking whether your mortgage deal has ended if it has you are likely to have moved on to your lender’s standard variable rate, which means your mortgage payments probably won’t be as cost effective as they could be. Have a look around for a new deal. 

Your mortgage will be one of your cheapest debts in terms of the interest rate that is charged on it, so if that’s in order to turn your attention to any other money you owe. If you have any outstanding payday or credit card loans focus on paying them off as quickly as possible since the rates they charge will be a lot higher. 

If you own a property and are struggling to find a way out of your debts, we can help. We’re experts at buying homes quickly. We can do it within seven days if necessary and will make sure funds are in your account on the day of completion.  

 

How to budget your money

Now you’ve had a good look at your expenditure and seen where you need to make savings, it’s time to work out the best way to run your household budget. 

There are several ways you can do it. What suits you will depend on your financial situation and your goals. Here is a couple: 

 

Budgeting to zero and automation

This keeps a tight rein on your expenditure. Each pound you bring in is accounted for so that you take your income down to zero, although it’s a good idea to have a small buffer in your current account.
This doesn’t mean you spend all your money, but you do account for it all. One effective way to do this is to set up different bank accounts linked to your current account, for each area of expenditure you will have identified by going through your outgoings.

These can include accounts for regular bills and costs such as groceries and petrol. You could also have accounts for monthly contributions to large annual expenses and unexpected costs such as a boiler repair, not to mention one dedicated to paying down debts or saving.
To keep yourself in check you can create automated monthly transfers of set amounts into each account. Once you’ve spent all the money allocated to, say, entertainment it’s gone until the next month. 

 

Percentage budgeting

Some people prefer to allocate a percentage of their income to different areas of expenditure. One popular way to do this is to spend 50% on essential needs, 30% on things you want but could survive without and leave 20% for savings or debt payment. 

It offers more flexibility, but also more opportunity to overspend. For example, without a specific food budget, it’s easy to buy more than necessary. However, by setting up bank accounts for each area it’s possible to keep an eye on how you’re doing. 

 

Beyond budgeting

Occasionally running a tight budget isn’t going to be enough to ease a difficult financial situation. Perhaps someone in your household has lost their job or you are going through a divorce. In these cases one way to free up funds quickly is by selling your home quickly, without paying fees for estate agents or solicitors. If you’d like us to help you do this, get in touch.

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