This is an most important task for any household. Setting aside a couple of uninterrupted hours for yourself and your partner to prepare a monthly household budget is essential. This time will be invaluable whether or not you also seek professional advice.
But where do you start?
I am a big fan of keeping things simple. This step by step process should act as a useful starting point for any household. One of the best ways to get a clear picture of exactly how much you are spending is to keep a diary for at least one month. Nothing fancy is required, a small notebook that fits in your pocket or bag is sufficient and commit to jotting down expenses on a daily basis.
Step 1 – You can go old school and simply buy a copybook or you can have a fancy excel document. Just ensure everyone involved in the budget is excel proficient if you going to go down the excel route.
Step 2 – Print from internet banking, or request from the bank if you do not have online banking, the last 24 months of bank statements for all current accounts. Also gather your P60’s, loan statements, deposit account statements, credit card statements, utility bills, insurance policies and pension statements. If you do not use your banking debit card regularly to pay for grocery shopping, also have as many grocery bills as you can ready.
Step 3 – On one page use the heading income and review your bank statements/P60s for your net (AFTER tax) monthly income (this is the amount that appears in your bank account on payday). Also include any social welfare receipts, annual bonuses, share dividends, state benefits and rental income. I would do it on a monthly basis first, starting with your actual income and expenditure for the prior month would be the best place to start. Next think together of any ways to increase this income figure. Could you rent out a room in the house, increase your hours, or create a new income stream? Are you claiming the correct tax credits? Do you need to seek professional advice here?
Step 4 – On the opposite page list only essential spending. Of course this can be debatable. To avoid arguments I would suggest this should include rent/mortgage, child care cost, car payments etc. Next should be your monthly grocery costs and monthly utility bills (gas, electricity, phone, broadband, transport, essential clothing, insurance costs, education costs etc). For utilities and grocery these will be higher at Christmas / winter months so try to take an annual monthly cost.
Step 5: Now think about non-essential spending such as entertainment, holidays and miscellaneous spending. The size of this spend could be the greatest surprise to you.
For a standard budget template you could take a look at www.mabs.ie
Action Point Post Budget Preparation
Scrutinise all spending
As regards essential expenses, could you convince your mortgage lender to offer a better mortgage interest rate? It may make sense to change mortgage providers. See my mortgages section here.
Clear Your Debts
It is important to clear debt, before thinking about saving. You could be sitting on a large credit card debt, it is worth checking is there a cheaper credit card on the market.
Debt is the single greatest threat to your financial freedom and security. The secret to getting rid of your debts is in putting your money to the best possible use. Your objective should be to get your loans onto the lowest possible rate of interest and then to use the saving to speed up the process of paying off your debt. Of course cutting your expenditure will also help.
In general it isn’t what you earn but how you spend it that will make the difference to your finances. If you only take one action make it your priority to get yourself out of debt. Consider consolidating your debt with your mortgage if that option is available to you. The most important thing is to review the cost of your debts and pay the most expensive debt off first.
Sensible borrowing is essential to buy a home, set up a new business, improve your home etc. What you should avoid is short term borrowing that becomes long term borrowing. Avoid long-term credit cards and store cards as much as possible.
It is important to think carefully before you borrow money. Don’t borrow money to pay for “lifestyle” items and don’t be blindly loyal to a particular lender.
Trim your expenditure page of unnecessary spending. Nobody said this would be easy but a little saving every month can really add up.
Plan to save
So how much should you have in savings? Read my article here to find out more about saving.
Prioritise savings only after expensive debt like credit card debts have been repaid. Next look at your savings for retirement. How is your pension performing? Are your existing contributions adequate to ensure you will have sufficient income at retirement age? If you do review pension statements and identify poor performance, arrange a meeting with your pension provider to discuss why this is.
The golden rule
Start to put a budget plan in place for your home. It doesn’t need to be anything fancy but both partners should be aware how money is spent and how much money is saved each month. If you do seek professional advice please bring this budget with you or if you simply do not have time to prepare this then ask your accountant to prepare an annual household budget for you.
Changes to spending patterns and lifestyle may be essential for your household. However without a plan in place you have no idea where you can even start. Get the family involved if you wish children learn by example. If you are responsible towards debt and savings the chances are they will develop good habits too.
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