What is budgeting about?
Budgeting is a key life skill. it involves being very aware of the money you have coming in (income) and the money you have going out (expenditure). Very few people are in the position of having enough money to buy everything they would wish to buy and so knowing how to budget and how to distinguish between the things that we need to buy and the things that we want to buy is essential to our financial well-being.
As with many life skills, the younger you are when you learn how to , the easier you’ll find it. This is because you won’t have had the time to get into any really bad habits.
Budgeting is key to taking responsibility for your money and, so long as you have an income of some kind, whether it be pocket money, an allowance or a part-time job, you’re ready to learn how to do it.
What is a budget?
A budget is a way of managing your money. It is a tool to help you see:
- how much money you have coming in;
- how much money you have going out; and
- the difference between the two
If you have more money coming in than going out, your budget will be ‘in surplus‘. This is good news. It means you have money to spare and can save for your future goals, whatever they may be.
If you have more money going out than coming in, your budget will be ‘in deficit‘. This isn’t so great because it means you have a shortfall and are getting into debt. If you carry on this way, it could lead to you facing financial hardship. The good news is that once you’ve completed your budget, you are then in a position to see what changes you can make to your spending habits to improve your financial situation.
Example:
Emma earns £70 a month from her part-time job and receives an allowance of £20 a month from her parents. She’s frustrated that her money seems to disappear very quickly. Emma would like to know where her money is going and whether it would be possible for her to save £15 each month so that she can treat her friends and family now and then.
Emma uses a budget template, as shown below, to work out her budget:
| Monthly income from all sources | £90 |
| (Less monthly expenditure) | |
| Mobile phone contract | -£15 |
| Travel | -£20 |
| Going out | -£25 |
| Day-to-day spending (coffees, treats) | -£20 |
| Clothes | -£15 |
| Equals a deficit of | -£5 |
So Emma is spending more than her income, leaving her with a deficit of £5 per month. She may have a credit card that is allowing her to do this, or she may be borrowing from friends or family.
Everyone’s budget will look different so why not have a go and draw up your own. Here’s a blank budget template for you to use:
| Monthly income from all sources e.g. part-time job, allowance, pocket money |
£ |
| (Less monthly expenditure) | |
| -£ | |
| -£ | |
| -£ | |
| -£ | |
| -£ | |
| -£ | |
| -£ | |
| -£ | |
| Equals a surplus (or deficit) of |
How can a budget help Emma?
The first thing Emma needs to do is examine her expenditure.
There are two main types of expenditure:
- Essential expenditure is the money that Emma needs to spend in order to go about her daily life.
-
- Emma might fee that this includes her mobile phone contract and travel expenses
- While essential expenditure cannot be gotten rid of, Emma might be able to reduce the amount she spends here, by, for example, shopping around and saving £5 on a cheaper mobile phone contract
-
- Discretionary expenditure relates to the things we want to buy, but aren’t essential.
-
- Emma might say that going out and day to day spending on coffee and treats are examples of discretionary expenditure
- If Emma did not want to cut these things out altogether she could perhaps challenge herself to halve the amount she spends on coffee and treats, and reduce her going out spends by £5
-
Let’s take a look at how Emma’s budget looks now:
| Monthly income from all sources | £90 |
| (Less monthly expenditure) | |
| Mobile phone contract | -£10 |
| Travel | -£20 |
| Going out | -£20 |
| Day-to-day spending (coffees, treats) | -£10 |
| Clothes | -£15 |
| Equals a surplus of | £15 |
By going through her expenditure, Emma has identified where she can make savings, freeing up £15 a month which she can now put into a savings account.
Go back to your own budget. Are there areas where you could cut down, freeing up income to save for your future?
Why is budgeting so important?
As we move from school to university or school to work our income rises, but so, typically, do our expenses. Budgeting can stop people falling into debt, but if debt becomes a problem, the StepChange Debt Charity and Citizens Advice are two organisations who offer free help. Their details are easily found online.
With thanks to our partners over at the NMBA for content.
Up next week – BORROWING!