Like everything else in life, learning how to manage your money, (if it isn’t something you have really taken the time out to do), takes both commitment and time to plan and understand. Here are my 5 essential steps that you can start doing right now, to finally take control of your finances.
I believe there are two main stages that you need to apply to successfully achieve your financial goals, so lets get to it.
1. Understand your income and expenditure/outgoing
Now, when I talk about understanding your income and expenses, I am not talking about estimations. So, don’t guess how much you spend on food, clothes or a night out, you need to really sit down and work out exactly how much is coming in (after tax) and how much you spend. The easiest way to do this is to look at your bank transactions.
This step is very crucial and without this, the rest of the steps below are pretty much pointless. So think about your lifestyle and what your expenses really are. For example, if you are someone that likes to eat out a lot, make sure you have separate figures for your weekly food shop and your eating out expenses.
There are some expenses that can be categorized under one heading (this will help you in step 2), i.e., if you have a car, but you also use public transport, you could just use the heading “Travel” as the expenditure heading however, you must make sure you account for both modes of transport in your figures.
So take the time (yes I said it, … time… lol), to make sure you go through ALL your expenses either on a weekly or monthly format. Why? Simple, if you want to achieve your financial goals, then you need to first understand your financial profile.
2. Create a budget
Depending on how you have approached step 1, this step should be relatively straight forward because you will be using the figures from step 1 to create your budget. For example, if you have determined that your weekly food shop costs you around £80.00 then you have 2 options when creating your budget:
a) Budget £80.00 for your weekly shop and leave it at that
b) Budget £84.00 for your weekly shop but only go above the set weekly budget of £80.00 for the reasons explained below.
So, where did the the extra £4.00 come from you ask, well, what I did after I understood that I spend £80 on food, I added an extra 5% on top of that figure as a safety margin, just in case the cost of food goes up, or they run out of my usual items so I have to buy one that is a little more expensive or I decide to buy beef one week instead of chicken. The extra 5% gives me a realistic budge that I can stick to. Now this safety margin isn’t to be applied to everything (lol), you know your lifestyle, so do it according to your needs. For example, I would add the 5% margin for food or transport but I wont add it for expenses like doing my hair.
Essentially, you should have a budget for each of your expenditure, and like I said in step 1, you can, (if you want) categorise some expenditures into 1 heading but you have to make sure you are setting a budget for each expenditure within that category.
After this step, you should have a good understanding of how much you are spending on what and you should have already started evaluating if you are spending too much money on certain things. This then allows you to adjust your budget to fit around the financial goals you have set for yourself.
3. Use your budget
Now we are moving onto the execution stage. We have set the scene, done all that ground work, so next, we have to put all that into practice. What do I mean by that? Simply put, stick to your budget, it’s there for a reason. There is no point doing all that ground work in the planning stage and you don’t actually follow through with your budget. How will you then expect to achieve your financial goals?
If you find that sticking to the budget is proving difficult or that you are actually not spending as much as you thought, then go back to step 2 and re-create your budget based on your new figures.
4. Track your spending.
Great work guys, you have created your budget and you are now using it but now you have to track your spending. Why? Well, all these steps outlined above evolve with you, they are not static. So if circumstances change or your financial goals change, you will need to revisit these steps to make sure it reflects your lifestyle. Also, as you have already done the ground work, it shouldn’t take you as long to go through the steps mentioned above in order to update your figures.
Nonetheless, if nothing changes, continue to track your spending, and review it either monthly or quarterly, to make sure that you are spending within the budgets you have set for yourself.
5. Emergency fund (This is not your savings)
An emergency fund is simply money you have set aside as a form of safety net for unexpected expenses such as car troubles, job loss, a medical or dental emergency or even unexpected home repairs.
Now that I have you on board with this idea, your next question is probably how much should my emergency fund be? Well, this will vary depending on your lifestyle, your income and your weekly/monthly costs, however, the rule of thumb is to put away at least 3 to 6 months’ worth of your income.
So, the ‘thinking stage’ is now way behind us (it didn’t even make this list lol), and it’s time you stop visualising achieving your financial goals and actually start achieving them. If you are ready to take that crucial step towards taking control of your finances, let me help you get started. I have done all the groundwork for you and designed The Budget Planner.
The Budget Planner is a free tool and it will be a game changer for you in taking control of your finances.
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