It is estimated that over half of the new years resolutions made this year will be financial ones.
If you’re one of the many millions of people with goals to save more, spend less, pay off debt, or even develop a long-term financial plan for 2014, then you’ll want to ensure that you carefully plan out and stick to a budget, because doing so will dramatically increase your chances of achieving those goals.
Regardless of whether your aim is to save up for a trip to Hawaii, pay off a student loan or spend less on shoes, a budget will help you see it through.
Step 1: Goal Setting
The process of well thought-through, planned out financial goal setting is essential.
Ask yourself specific questions so you can have absolute clarity over exactly what it is you want/need to achieve your own personal ‘financial freedom’ – whatever that phrase may mean to you.
How much do you need to put by for that deposit? How much could you save each week by cutting out cigarettes?
What amount do you need monthly to cover the cost of the new car you’ve been hoping for?
By writing down the answers to your versions of these questions based on your circumstances, you’ll be able to have a clear vision of exactly what you need to do, and it’ll be much easier for you to do it.
Step 2: Track what you’ve been spending
Not only is it important that, starting from now, you meticulously track all your outgoings, it’s also important to get a solid understanding of where you’ve been spending your money over the last few weeks and months.
This will help you to set realistic targets for the new year, because if you’re actually spending £100 a week on food currently but you budget for £50, you’re probably going to fail.
This process is also going to help you to identify leaks in your daily spending where you’re needlessly spending amounts which may not seem like a lot at the time, but add up to a lot over a longer period, such as fast-food stops every morning or lunch.
If you’re a traditionalist, you could hold on to all your receipts and keep a hand written account of everything you spend, or you could use one of the many free (or very cheap) budget apps for mobile devices, such as iReconcile, Expenditure or MoneyBook.
- Keep track of your spending with one of these Google Chrome budgeting apps.
Step 3: Prioritise and organise
It’s important that you not only have certain financial resolutions, but that you prioritise exactly what percentage of your income you should be spending where. A common formula people use is the 50-20-30 rule, whereby 50% of all income goes on essentials such as accommodation, bills, groceries and transport, 20% on debt repayment or savings and 30% on extra lifestyle items such as shopping and travel.
This formula may not be suitable for your personal goals however, so prioritise what’s important and what’s not in your life and decide for yourself how much money each of those aspects in your life really require.
Step 4: Keep a check on your progress
Unfortunately, the hardest part of making a new years resolution isn’t the making part, it’s the keeping to it.
This is where the budget management apps coming in handy, because they’ll allow you to quickly and easily view your budget (perhaps daily) and assess your progress.
You’ll be able to see if you’ve spent an extra £20 on clothing, for example, and will be able to clearly plan how to make up for that overspend elsewhere in your budget.
Don’t think the hard part is done when you’ve finished writing your goals and made out your budget plan.
Ensure to regularly keep a track on your progress and hold yourself fully accountable for any set-backs.
On the other side of the coin, however, this process can also bring positivity, as if you’ve done well and saved more than you had to over the month, you’ll know exactly how much and can then go and treat yourself appropriately!
Step 5: Be flexible
Lastly, consider your budget as a living organism! It’s alive and needs constant attention and adjusting as and when necessary.
Be flexible with it if it’s clear that a change is needed.
If you’re smashing through your entertainment budget every week then you might need to raise that and look to cut back elsewhere.
Additionally, as you meet specific goals, find new ones, or your income/expenses change, then the budget ought to be adjusted to reflect your new situation.
Having a budget is ultimately about putting you in control of your money, not about restricting you.
It allows you to feel empowerment over your pounds and pence so as to dictate exactly where it should go, instead of it being wasted on unnecessary or incidental purchases.
Image: Freedom Beach, Ko Tao, Thailand – Photo by Mr & Mrs Backpacker.
