Transcript
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NARRATOR:
How to build and manage a budget. Building and running a budget is the key foundation for good personal financial management, and it’s easy to do. An annual budget provides a comprehensive overview of your income and your outgoings.
Start with all your income, including earnings from work, benefits, pensions and investments. If you’re not sure about any income, it’s best not to include it, then if it comes, it’s a nice surprise. Then set out your forecast spending, but divide the items between essential and non-essential or discretionary spending.
Set out essential spending first. These are items you have to pay for each year, so this will include mortgage repayments and rent, council tax, utility bills, income tax and national insurance if you’re self-employed, essential insurance costs, for example, home and car insurances food and drink, broadband, and mobile phone bills. When that’s done, add up the essential spending items.
Now, focus on the discretionary areas of your spending. These are still items you’d expect to spend money on each year, however, it’s up to you how much you spend on these. The items here include clothing, holidays, club memberships, meals out, birthday, and Christmas presents.
In here, it’s also best to add a section for money you’re putting aside for a rainy day fund, unless you already have one. This will help pay for car repairs or a new washing machine if you have problems during the year. Now, add up the forecast discretionary spending and your essential spending.
Compare your total income with your total spending. Have you got excess income or excess spending? If your spending exceeds your income, then you’ll have to see where you can cut back to avoid having to borrow money, or you’ll need to draw on savings to cover the gap in income. It’s easiest to focus on cutting back the non essentials, but always check you’re paying as little as possible for the essentials. For example, could you switch to a new energy supplier to pay less for your gas and electric bill each month?
If you have more income then you’ll spend, you can use it to add money to your savings, whether that’s for a specific purpose, like a new car, or buying a home, or just to have something set aside for a rainy day. If you’re now into your budgeting, you can take your annual budget and use it to work out your income and spending for the coming month. This gives a picture on a more practical level of the amount you might have in your bank account and what it needs to be spent on, whether that’s paying the month’s essential bills, or putting something aside this month for a holiday in six months time. It’s important to have both the annual budget and the monthly one, as you’ll find that spending varies quite a bit from month to month. Some items you’re spending, for example, paying for car insurance or holidays, only occur in some months rather than every month.
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