My current strategy has been in place for 7 years and it has served me very well, and through lean times too. We have experienced everything from monthly income to redundancy, weekly income to fluctuating freelance income. I’m pleased to say this system has seen us through all scenarios, good and bad.
The main part of the budget comes from Your Money or Your Life, which I highly recommend if you need a money overhaul.
Here’s how it works.
1. Write down ALL expenses.
Make a list of all expenses, include amounts for ‘unforseen’ expenses like white goods breaking and car repairs as well as direct debits and a realistic budget for food and fuel.Being exhaustive in your list is best as that gives you a REALISTIC £ amount based on actual life, not what we’d like to happen ie. things never breaking.
If you class holidays as a necessity then add a budget in for those too, as well as an allowance for Christmas and birthdays.
2. Working out the monthly bill
Yearly expenses – divide by 12 to give you a monthly figure.Monthly expenses – can be added as they are
Weekly expenses – x52 then divide by 12 to give you a monthly figure
Unforeseen/adhoc expenses – guesstimate the yearly spend and divide by 12
Tip – Round all expenses up to the nearest 5 or 10, this creates a buffer for those times when expenses exceed what was expected.
Now add everything up to create a total monthly expenditure.
You now know how much you need to make a month to ‘break even’, that in itself if a useful thing to know if you’re a freelancer!
3. Allocating money for bills.
If you’re paid monthly then allocate the monthly bill figure to a bill account before any other expenditure.If you’re paid weekly as we are, times your monthly bill by 12 and divide by 52. This is the weekly amount you need to put away.
If your income comes in sporadically then transfer all income to the billing account each month until you’ve reached the total bill figure. You may need to make up a shortfall from your savings pot some months (see below)
4. Day to day living and paying bills
All bills and direct debits should be paid from the billing account. Fuel expenses and food budget should be drawn from this account weekly or monthly. The budget set for the family holiday or Christmas should also be drawn from this account.What about when expenses change? If you have a spread sheet that calculates your expenses for you as I do then you just adjust the figures and acknowledge the new total bill. If not you can do a check every quarter to ensure expenses are the same.
5. What to do with ‘surplus’ income
Some months there may not be anything left over, that’s life I’m afraid and where you may have to dip into savings (see below).Other months there may be plenty left over. Allocate a % for savings, a % for paying down debt and a % for treats and luxuries.
Allocating money to savings and paying down debt is absolutely essential during ‘feast’ months as this will see you through the quiet periods. It also gives you a pot if you fall short of your total bill amount, you may have to dip into the savings pot to make up the shortfall.
And that’s it. This system accounts for nearly all the expenses you can imagine so you will start with piece of mind and a clear £ amount that you need to reach to break even. Good months will see you squirrelling money away to smooth over quiet months and slowly but surely you will build up a savings pot which will add to your piece of mind
Do you have your own budgeting system? What tips would you add?
