Budgeting 101

There always seems to be something big around the corner you have to save for, not enough money coming in and not nearly enough spare cash left over to spend on yourself!

So as we get older and our spending habits change, the way we budget may need to alter.

The process for budgeting is the same, whether you are 21 or 71.

Always start with your income:
-Salary (if you’re working)
-Pension both government or private
-Interest accumulated from savings
-Additional allowances or benefits from either the government or privately
-Income or dividends from investments or shares
-Rental income from any additional properties owned

Secondly…

Your expenditure:
-Mortgage or rent payments
-Utility bills
-Ground rent and administration charges for accommodation
-Phone/internet
-Car repayments, running costs, tax, insurance
-Outstanding loan or credit payments
-Food, clothes, movie tickets, eating out
-Subscriptions to magazines, sky tv etc
-Hobbies or regularly attended classes you attend

With budgeting, it’s better the devil you know. Once you can see on paper what comes in and what goes out it’s certainly easier to figure out how you can reduce certain areas of expenditure. The more ambitious your retirement plans are the more you must re-evaluate your spending in order to pay for it.

Top Tips:
-Sensible car choice. Do you need those lofty monthly repayments so you can sit on a car that’s 12 months newer than your old car simply to drive to the supermarket and back?
– Indeed could you sell the car, do you need it? Can you manage with public transport? How much will you save by doing so?
-Reduce subscriptions, change to a smart TV, an initial large expense can provide you with a plethora of channels to choose from, without the monthly Sky subscription. The same applies for books or magazines, either invest in a kindle where you can buy the same books for a tiny fraction of the store price for the book or use make use of the library.
-Understand you mortgage, it maybe worth using a little of your savings to get the house paid off. You will be surprised at how much interest is charged even as your come to the end of your home loan.
-Kill two birds with one stone, are you recently retired and finding it difficult to stimulate your self mentally and don’t have the money to go and do the things you want to do? A part time job could be the answer to both these problems.
-If you’re still at the working age, try this simple tip. One pay day set aside your money for bills/fixed expenses etc and at the same time move money into a separate account for later life. You will always live to your means, and if the money is gone on day one there is much better chance it won’t be spent. The most common mistake is people waiting to the end of the month, seeing what is left and trying to save…

Ramit Sethi, author of the book, ” I will teach you to be rich” says that you should always split your money into four key areas. Fixed costs, investments, savings and guilt free spending.

His advise for a young adult just out of university is as follows:
50-60% Fixed costs – Rent, utilities, car etc
10% Investments – Pension plan, shares, property
5-10% Savings – Holidays, your wedding day, unexpected expenses
20-30% Guilt free spending – Eating out, alcohol, clothes, movies etc

So how does and should this ratio of spending alter as we reach retirement?
25-30% Fixed costs- Mortgage repayments should be coming to an end, you may also decide to down scale or sell your car.
10% Investments – Again your pension plan will take effect and you will no longer be paying into it, however never stop investing your money into something.
15-20% Savings – Up your savings so you can enjoy retire to the fullest.
50% Guilt free spending- Realistically you will be spending more money on the things you enjoy during retirement.

This doesn’t need to be a set in stone table of organising your money as it will alter between people’s individual needs. However setting out a plan like this and seeing how it differs as your life changes is certainly a good place to start.