To work out a household budget, it is important to know exactly how much money you have coming in. Calculate what you have left from your salary once you factor in tax deductions, National Insurance and pension contributions, alongside other possible sources of income, such as investments that generate returns. You should do this for at least the previous three months, as your income may vary slightly from month to month, so you can determine a realistic average. This is especially important if you are self employed, or work on a commission basis.
The next step is to find out where your money is going, so spend some time looking at any relevant documents containing this important information – it could be anything from bank statements to shopping receipts.
Now you have a clear idea of how much money is coming in every month and what it is being spent on, it is time to closely examine how much is going towards ‘essential’ expenditure – in other words, your basic living costs. You can work this out by calculating how much you spend on things like groceries, mortgage payments and energy bills. Calculating your essential spending can help you identify areas where savings can be made. For instance, if you think you are paying over the odds for an insurance policy or a broadband contract, you could negotiate with your provider or switch to a new one.
Now that you know how much you are earning in a typical month and how much you spend on absolute essentials, you can then take a close look at your discretionary spending. Ask yourself some searching questions so you can see if you are using your disposable income wisely, as this could help you work out if you can afford to put more money into savings, into a pension, or investing elsewhere for your future. You should make sure your budget reflects your financial goals, so that you are still in a position to work towards ambitions such as having more disposable income or saving for a holiday.
Many families work to the 50/30/20 rule, with 50% of income being spent on essentials, 30% on non-essentials, and 20% going into savings. Whilst this is not a hard and fast rule, it does demonstrate the various factors you should keep in mind as you find a figure that works for you and your family. With today’s high inflation rate and current cost-of-living crisis, your family may need to have a higher percentage of monthly income spent on essentials and less going into savings. Not only can budgeting put you in a stronger position to stay within your financial means, it can also keep you on course to achieve your longer-term financial ambitions, such as building a pension pot for retirement.
