Budgeting 101

I’ve been researching budgeting a lot in preparation for moving and I thought I’d share what I’ve discovered for anyone that might be interested in doing something similar.

Most budgets are calculated based on the amount of income a person earns in any given month. Since I’m currently unemployed and will be living off of my savings for at least the next month or two mine will be a little different. I have around £8,000 set aside for this new adventure and I’m confident that this amount would last me until at least the end of August all going to plan. Obviously I want to use as little of my savings as possible and find a job as quickly as I can so that I have a regular income again but for the basis of my budget I’ll user 25% of these savings as my monthly “income”.

Expenses  >  Income  =  Bad   &   Expenses  <  Income  =  Good

With any budget you always want to spend less money than you earn. It really is that simple. How you then go about setting up a budget can be as easy or as complicated as you like.

There are two main ways of personal budgeting, you can either allocate every single penny into a particular category (including savings if that is something you choose to do) or you can work out roughly how much each category costs and ignore the excess left over. The second only works if you already spend less than you earn. If the totals for the categories is more than the amount you earn then adjustments will need to be made until the two are the same and the first is probably the option for you.

Choosing which categories to use is probably the hardest part of budgeting. Simple budgets use only two: Fixed and Variable. Fixed expenses stay the same each month and are usually essential to your way of living including mortgage/rent, loans, insurance payments. Variable is of course the opposite, expenses for which the cost varies sometimes dramatically such as groceries, entertainment and travel. This site has a list of over 70 categories you can use to divide up your earnings but personally I think that may be a little overkill.

As I said previously I’ve been tracking my expenses for quite a while now and I prefer a happy medium, something that isn’t too granular but still shows me exactly where my money is going. In the past my categories have generally been: Food/Drink, Eating Out, Gifts, Travel, Entertainment, Essentials and of course Miscellaneous to catch anything that doesn’t fall into any of the others. Obviously being in a new city means that my expenses won’t be quite the same as they have been but budgeting as a whole really is trial and error until you find something that works. What works for me might not be right for you but I hope writing about my experiences with budgeting helps others.

The really important thing about budgeting is referring to it constantly and reviewing it frequently as and when your circumstances change. Once you’ve got your budget to a good place (i.e your expenses are less than your income) you can start to use it as a tool to plan for the future; paying off debts faster, setting money aside in case of emergency or saving up for that dream vacation you always thought was beyond your reach. Once you see areas you can cut spending and start saving for the good stuff – that’s when budgeting can get addictive! You can also make mini budgets for things like home improvement projects or holidays so you can see where the money needs to be spent.

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