Do you spend more than you earn? Don’t know? Learn to budget using Martin Lewis' ‘piggybanking technique’
For more help, and further info see the useful links section top right
Are your outgoings more than your incomings?
How much do you earn each year? How much do you spend each year? Strange isn’t it – most people know the answer to the first question but not the second and unless you know both you’ve no chance of balancing your books.
- That’s why it’s vital you know exactly what your incomings and outgoings are.
How to do a PROPER budget
Sadly, the budgets most people try don’t work for two primary reasons:
- They only look at one month's spending. This is a problem both because our spending patterns change and because they ignore weekly shops, annual holidays or changing car tires every couple of years. This is the reason many people think their budget balances, and can’t understand why they end up building up debts.
So how do you fix this? Take Christmas as an example. Let's say you spent £600, that needs to be counted as £50 a month, every month in your budget so it is accurate.
- They miss the little things. Many budgets, even some detailed ones, only have a few limited categories such as ‘motoring’. Yet we don’t spend on motoring, we spend on petrol, car insurance, breakdown cover, new tires, MOTs, service costs, repairs and more. Unless you factor all these in it doesn’t add up.
When you do a budget you need to think beyond a month and go into detail. The best thing is to gather at least three months of banks statements, bills and credit card statements together and start to add up your real spending.
As a practical example, with food shopping, gather together all you've spent for the last three months, then divide by three to reach your average monthly spend.
Also gather your pay slips or other documents to establish exactly what you earn (though your statements should detail this info).
Many people find, while it take a bit of work, simply the process of sorting through your finances is a cathartic step that helps you discover many things that you’re not doing right in the first place – and is the start of fixing the problems.
See the useful links section for more details and free budget tools
Once you’ve done a budget, hopefully you’re spending less than you earn; if not, you need to try to get it to balance (see the money makeover article in the useful links section, top right, for more detail).
The first step is to ensure you’re not overpaying for anything. Many people are wasting 10% or more of their disposable income on paying too much for energy bills, phone, credit card interest, car insurance and more.
Piggybanking: stay within your budget
It's time to go back to your budget at this point, and try to make it balance. This is primarily about allocating how much cash you have available to spend on different things. Of course, that’s easy on paper, the difficulty is sticking to it.
One of the main problems is that looking at the amount in your bank account does not give a fair reflection – it only gives you a snapshot of that day's total. It doesn’t include what money you’ve already spent and what’s due to be paid out.
A good way to do that is by ‘piggybanking’, which involves setting up different bank accounts for your main areas of spending.
- Plus, because the right amount to cover bills is coming from your account each month, you now know that when you look in your main account you can genuinely spend what you’ve got in there.