Times have been unusually tough for a lot of people in recent years. Even people with a decent income have been squeezed by inflation. For them, the process of budgeting extends beyond mere expense tracking. It’s about strategically managing resources to sustain and grow wealth, aligning spending with values, and preparing for future financial goals. Here’s a guide to help you navigate the essentials of budgeting effectively.
What are the Basic Budgeting Rules You Should Stick To?
- Pay Yourself First: Allocate a portion of your income to savings and investments before spending on other things. This ensures you are consistently building wealth. You should also consider paying down any expensive debt which drains your finances.
- Track Every Pound: Regularly reviewing your expenses helps identify unnecessary expenditures and opportunities for savings, but it is important for other reasons. Understanding your expenditure will help you, and your financial planner, understand how much income your invested wealth needs to generate to fund your lifestyle both in and before retirement.
- Use technology: Tracking expenditure sounds incredibly boring and time consuming, but most banks will now provide either their own apps or a feed into other apps which show how much money you pound each month and categorise them into different types of expenditure. Most of us have a tendency to underestimate how much we spend so an accurate figure helps keep us all honest.
- Set Clear Goals: Define your financial goals—both short-term and long-term. Whether it’s funding a child’s education, buying a vacation home, or retirement, having clear goals with time horizons guides your budgeting priorities.
- Allocate for Emergencies: Maintain an emergency fund that covers at least six to twelve months of living expenses. This provides a cushion against unexpected financial setbacks. Six to twelve months may seem an arbitrary figure and you might be able to work a better one out for yourself, but it’s a good start point.
- Regular Review and Adjustments: Periodically review your budget to ensure it aligns with your financial goals and adjust as necessary to account for changes in income or expenses.
How to Make a Budget: Tools and Techniques
Creating a budget can be streamlined using various tools and techniques:
- Apps: Numerous budgeting apps can automate and simplify the process. Apps offer features tailored for affluent individuals, including investment tracking and detailed financial analysis.
- Excel: For those who prefer customisation, Excel is a powerful tool. You can create a personalized budget template, incorporating formulas to automatically calculate totals and differences. This method offers flexibility and control over your data.
- Pen and Paper: Some prefer the tactile process of writing things down. This method can be effective if you find that physically recording expenses and plans helps reinforce your financial discipline.
- Cashflow modelling: Once you have your budget down, we have the software to model this out over the years, including assumptions around inflation and certain life events such as retirement, and check that you won’t run out of money in the future.
What Does a Good Budget Look Like?
A well-constructed budget typically includes:
- Income: Document all sources of income, including salary, investments, rental properties, and business income.
- Fixed Expenses: List all recurring monthly expenses such as mortgage payments, utilities, insurance, and memberships.
- Variable Expenses: Account for fluctuating costs like groceries, dining out, entertainment, and travel.
- Savings and Investments: Record what you currently put towards savings accounts, pensions and investments. It’s our job to establish what the right amount will be to fund your future lifestyle, and if it needs to change in future.
- Debt Repayment: Include any payments towards loans or credit card debt.
How to Stick to Your Budget
- Set Realistic Limits: Ensure your budget is practical. Overly restrictive budgets are hard to maintain and can lead to frustration and overspending.
- Automate Savings and Payments: Automating transfers to savings and investments, as well as bill payments, reduces the risk of missing a payment and helps in sticking to your financial plan.
- Regular Check-ins: Schedule monthly or quarterly reviews of your budget. Use these sessions to track progress, make necessary adjustments, and celebrate achievements.
- Accountability: Having someone to discuss your financial goals and progress with can provide additional motivation to stick to your budget. This is a big part of our service.
How to Factor in Budgeting/Managing Budget as a Shared Household
Managing a budget in a shared household requires collaboration and clear communication:
- Joint Bank Accounts: These can simplify the management of shared expenses but might not be suitable for all couples. Joint accounts work well if both parties have similar spending habits and trust each other’s financial decisions. Alternatively, maintaining individual accounts alongside a joint account for shared expenses can offer a balance between autonomy and shared responsibility.
- Clear Communication: Discuss financial goals, spending limits, and budgeting responsibilities openly. Regular financial meetings can help ensure everyone is on the same page and prevent misunderstandings.
- Divide and Conquer: Allocate specific budgeting tasks to each household member based on their strengths. For example, one person might handle bill payments while the other manages investments.
- Unified Goals: Establish common financial goals and work towards them together. This fosters a sense of partnership and mutual accountability.
- Transparency: Maintain openness about personal and joint expenses. This transparency helps build trust and ensures that all household members are aware of the financial situation.
Conclusion
For our clients, budgeting is about more than just managing expenses—it’s about strategically aligning financial resources with long-term goals. By adhering to basic budgeting rules, utilizing effective tools, maintaining discipline, and fostering clear communication in shared households, you can master the art of budgeting. This not only helps in sustaining and growing your wealth but also ensures financial harmony and preparedness for the future. Always remember to regularly review and adjust your budget to reflect changes in your financial landscape, ensuring continued alignment with your evolving goals.