The common sense money guide to effective budget planning

How often have you heard the phrase, "I don't know where my money goes?" You may have even said it yourselves. Most people who say this have never tried to understand where their money goes, and this is where budget planning is an incredibly useful exercise and is the first step on the road to having control over your money. It is a simple, straightforward, effective tool and is designed to hold up a mirror to your finances and clarify the changes you need to make in your financial affairs so that you are able to meet your financial goals.

Many professional independent financial advisers adopt a different approach which involves spreading your money over a range of different investment types (or spreading your eggs over a number of different baskets). This approach is called asset allocation.

Why budget plan?

To use an old adage, failing to plan is planning to fail. Although this may sound cliched, it is undeniably true. Budget planning is about you understanding whether you are living within your means, and if not, the changes you can make to improve your financial health. Without budget planning it is tough to understand the changes you need to make. Budget planning is effective for individuals who find themselves in a position where they are short of money, but is also an incredibly useful exercise if you are financially comfortable. It is designed to focus financial thinking and understand where you could use your money in the most effective way possible. Professional financial planners conduct this exercise as a matter of course and is always the first step in ensuring they understand their client's financial situation.


How to budget plan

The first step is easy, Complete a budget plan. There are a number of online tools, including the FSA Budget Calculator, and complete it fully. Start on the date your main income starts (for most people this is when they recieve their monthly salary). Be open and honest when you complete it, if you don't you are only fooling yourself. Include all sources of income including salaries, "self employed" income, state benefits, investment income and savings income. The next step is to calculate yourexpenditure. Include all your expenditure from the larger bills like your mortgage, loans, car insurance and council tax. Don't forget to include the smaller amounts of spending like your morning coffee, lunches at work, newspapers, leisure costs and meals out. The smaller amounts tend to be more regular than the larger amounts and can be harder to track, however it's valuable working these out so that you have a complete understanding of where your money is going.

I've done my budget plan, what now?

Once you have completed this you will have a picture of how much money you overspend per month, or alternatively, how much you have spare on a monthly basis. Then you have decisions to make: if your expenditure is more than your income each month, the question you need to ask yourselves are "How can I reduce my expenditure?", "What can I save money on?" or "What changes can I make to reduce my monthly expenditure?" This may range from trying to get a better deal on your mortgage, consolidating debts, cutting out the purchase of the daily paper, reducing the amount you eat out or try shopping for shoes or suits less often!! If looked at logically, there is normally always something you can do to reduce your expenditure.

However, there are occasions when your expenditure is as lean as it can be... what do you do then? Logically, if your spending cannot be reduced, the only option you have is to increase your income. Firstly, look at whether you are entitled to state benefits you are not currently receiving. Billions of pounds of benefits go unclaimed each year - £10 billion in means-tested benefits alone - so make sure you don't miss out what is due to you. Next, look at what else you can do to increase your income. This may range from working part time, starting your own business, or spending Sunday morning selling your unused goods at a local boot sale.

If your income is greater than your expenditure, consider how you use this surplus income. One important area to consider is your future plans, you may be comfortable financially now, but it is important to keep one eye on the future. Do you save enough money for your retirement? Do you save enough for your children's education? Have you built up an emergency fund to cover unforseen circumstances?

One thing to remember is that budget planning is about managing your money effectively, not about cutting all the fun from your life. Spend money enjoying yourself, it's the reason we earn it. However, ensure that you "live within your means" and you can enjoy your life now and also ensure that you can do so in the future.

Next Steps

There is one simple next step, take action. Budget planning is effectively making you aware of the problem.... You then need to take action to solve it. The action you take depends on your individual circumstances and issues. If you are struggling about the next steps, seek professional advice, either from the Citizens Advice Bureau or a professional financial adviser.