We've looked at budgeting basics, so now we need to identify all the bills we pay on a regular basis. So, let’s group these into a few categories:
First, we have regular direct debits that go out every month and are pretty much for the same amount each month. They might fluctuate a little bit, but generally they’re regular and predictable, which makes them easy to manage. These are mobile phone bills, utility bills, rent, mortgage and other debt payments – you know the drill:
Then we have items where we’re saving for expected bills but which are not monthly. They may be once a year, and you know roughly how much it’s going to be, although it’s usually more than you expect! Maybe a car service, ballet school invoices that come in once a term – anything which you know is coming and which you’d like to prepare for, rather than have to budget for all in one month.
Then you have short-term savings for things like Christmas, birthdays or holidays. Some folks call these sinking funds – I don’t know where the term comes from. The idea is that you shouldn’t have to pay for an event like this all out of one month’s income.
Paying for Christmas all out of your November or December income would be hard work when all the other stuff continues as well. That’s why most people resort to credit cards and overdrafts. How much better would it be if you could spread the cost throughout the year? So take your expected annual cost – let’s say you want to spend £500 on Christmas. If you divide that by twelve months you get £41.66 that you should save each month.
Top tip, divide by ten instead and get ahead. So, if you want to spend £500 at Christmas and you divide by ten, you’ll get £50pm. Multiply that back out by twelve months and you’ll have £600 available at Christmastime either to go all-out, or to put aside for something else.
Finally, you have long-term savings. Assuming you’re free of bad debt then you should be saving each month toward your future, not just for the short-term, within-one-year stuff. Those regular saving and investing amounts are regular bills too, and should be accounted for each month.
Make a list of all these regular bills. Your every month bills and debt repayments, mortgage, rent and stuff like that. Then the stuff that you’d like to put money aside for – any irregular bills (car service etc). Then your short-term savings: sinking funds, Christmas, birthdays, and then your long-term investing and savings for the future, once you’ve paid your debt.
Get your calendar out and look ahead to everything happening at least for the next six months and ideally for twelve. Work out what each of these events might cost you and divide by either 12 or 10 or the number of months before they happen, to start working out what you’re going to need to put aside every month.
You might want to think of these as jam jars where you put your money aside each month knowing that there will be enough in the jar when Christmas comes or whatever. Or maybe envelopes – whatever works for you.
This is simply a method of smoothing out larger, irregular expenses over twelve months rather than finding all the money in one go, or worse – putting it on a credit card and paying interest while you pay it off. When you add all these bills together, you should end up with a total amount that will cover all these things every month.
Now, if you work this out and it leaves you with £3.50 to eat for the month, then you have an issue. You’re going to need to find a way to earn more or spend less to pay all your bills and have enough left over for the day-to-day stuff.
Let’s be clear – if you don’t have enough coming in to cover your lifestyle, you have a serious issue which can only be fixed by big action. That might be taking another job, radically cutting expenses, maybe even moving back home with parents for a while until you get fully on your feet.
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