editor It might be a tough pill to swallow for some, but budgeting is an essential skill for anyone who claims to be a functioning adult. All too often, I’ve heard twenty-somethings utter something along the lines of: “We should’ve been taught this in school.” Well, you’re right – we should have.
For millions of young people (or former young people), its inclusion in formal education would’ve saved them the stress of making it to the next payday unscathed, equipped them with the know-how to start saving from a younger age, and prevented transformative financial losses that led to tough learns. Though there are signs that personal finance may be folded into secondary education, it’s all too likely that we’re still years away.
If you’re wondering where to begin with a budget and how to construct one that fits your lifestyle, then you’ve come to the right place. In this article, we’re going to offer you strategies that’ll give your money purpose and make it go further.
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How Much Are You Spending?
Before you do anything, you’ll need to know exactly how much your life is costing you every month. Take a step back and observe the raw objective facts. Examine the past two months’ bank statements, paying close attention to standing orders and direct debits that recur monthly.
Categorise your spending into different groups:
- Housing: Rent or mortgage, and utilities
- Food: Weekly grocery shops, takeaways, and meals out
- Transportation: Car finance payments, insurance, or train tickets
- Subscriptions: Music and TV streaming
- Disposable Income: socialising, shopping, and other personal spending
You might come across patterns that you didn’t expect. Perhaps those takeaways add up to more than you expected, or you don’t have as much control over your online spending habits as you expected. But don’t feel ashamed. This isn’t about judgement; it’s about being objective. When you see the reality of your current financial situation, you have a starting point.
Decide What You Want Your Lifestyle To Be
Now that you’re aware of the good, the bad, and the ugly of your spending habits, you’ll likely have some thoughts about how this stacks up against the more idyllic lifestyle that you’d thought you had. So now is the time to consider how you can transform this list of bills and payments into something that better reflects the life you really want.
So make a list of your top financial priorities. For some people, they could be hobbies or fitness. For others, it might be to save up for an engagement ring. Either way, your budget should work towards what really matters to you. These priorities should be areas where you’re more willing to part with your hard-earned cash because they add more value to your life.
At the same time, identify areas that don’t matter as much. Maybe your fast food budget doesn’t need to be so high, or you’re looking to minimise the time you spend watching TV. These can be opportunities to save money without feeling like you’re making important sacrifices.
Distinguish Your Needs, Responsibilities, and Lifestyle Choices
Every practical budget should consist of three layers:
- Needs: Your core needs, like rent, utilities, weekly grocery shopping, and insurance payments.
- Responsibilities: Financial commitments, like savings and credit card payments.
- Lifestyle choices: Spending that makes your life more fulfilling, like eating out, entertainment, and hobbies.
All three layers are important. Too many budgets flop because they focus too much on needs and responsibilities and treat lifestyle choices as an afterthought, which can leave people feeling deprived and cause burnout. So if you want a more realistic budget that’s genuinely sustainable, give yourself more wiggle room for your lifestyle choices.
The amount that you want to save is very much dependent on your goals. Although many opt for the ‘50, 30, 20’ rule, it’s important to recognise that this isn’t an iron-clad rule that applies to everyone. I’d advise starting off low to ensure that you’re saving while living the life you want. That way, you can always increase the amount that you save if you can afford to.
Avoid dipping into your savings for casual spending or bills, and instead view the money as either aligned with a specific goal (e.g. a holiday or major financial commitment, like buying a house) or a rainy day fund in case you’re faced with sudden expenses like a surprise trip to the vet’s, or there is a major shock to your income, like losing your job.
Set Your Spending Limits
When setting spending limits, do so based on the categories we discussed earlier (e.g. housing, food, and disposable income). Base these limits upon your actual spending history and priorities, not on unrealistic fantasies. If you’ve been spending £500 per month on groceries, a £150 limit is only going to make you frustrated.
Setting realistic spending limits for yourself will build confidence, because every month that you stay within your budget, your trust in it will grow.
Closing Thoughts
Too many people enter adulthood totally unequipped to handle their monthly spending, without so much as a single lesson on how to craft a budget that organises their spending habits, while allowing them the freedom to spend on the things that they truly enjoy.
It should be flexible and empowering, respecting your habits and guiding you towards your goals. It might not immediately click into place, but over time, with some tweaks here and there, you’ll create a budget that works for you.
It should give you the confidence to handle regular expenses and soften the impact of unexpected situations like emergency repairs, trips to the dentist, or lengthy legal processes like credit hire claims.
