Ultimate Guide to Budgeting – Get Prepared

Now we've got to grips with the basics of budgeting, we need to get prepared, and review how things are at the moment.

Take Stock

If you’re budgeting for the first time, there’s a good chance that your finances aren’t in great shape. Don’t worry – it’s onwards and upwards from here on in, but before things get better, we need to take stock of where we are.

First thing we need to do is to write down all our debts. Credit cards, overdrafts, store cards, personal loans – everything that I would categorise as bad debt. Bad debt is identified by two criteria – firstly, a high interest rate and secondly, it’s used to buy stuff that goes down in value. If one or both of those are ticked, it’s a bad debt and we need to get rid of it.

We also need to take a look back at our spending for say the past three months. Pull out your bank statements and credit card bills and take some time to look at where you have been spending the most. It’s discretionary spending that is the biggest issue for most of us. We all know we have to pay our bills, but we often lose control over the stuff that is non-essential.

I don’t want to kill your enthusiasm before we begin, so I’m not going to suggest you take hours to look at each line on your bank statement and categorise it. Chances are you know really where you are mis-spending your money. You’ll know where you need to rein things in – we all have our vices!

So be real with your self – there’s absolutely no point in lying to ourselves and yet we do it all the time. Identify your failings, your weaknesses when it comes to spending, don’t dwell on them, but identify them. From now on, things are going to be better than they have been.

Have Two Bank Accounts

This is without question the best trick I have ever learned when it comes to managing money. Having two bank accounts enables you to vastly reduce the time you need to sort your budget out each month. The first account is your bills account, and I suggest that you get your income paid into this account. Out of this account you will set up all your direct debits for the regular bills.

The second account is your spending account. This is the account you’ll use for day-to-day spending; basically, whenever you use contactless or a card or if you take cash out of the ATM. This is for food, fuel, restaurants, nights out, clothes shopping – that sort of thing.

By using one account for regular bills like direct debits, which are usually the same every month, you don’t have to think about them. You just leave enough money in that account to pay them and then budget what’s left.