Finding financial freedom in your household budget

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If you’ve heard it once, you’ve heard it a thousand times: planning a household budget is important. Yet, 40% of people don’t have one

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A household budget helps you avoid financial stress, running up unplanned debt and relationship disharmony (financial stress has a negative impact on more than a quarter of UK couples). It also means you can plan for your future and are better equipped to manage life’s inevitable surprises. Yes, it takes a little time, but the payoff is worth it. Here’s how it’s done.

Work out what you’ve got to play with

Knowing what you’ve got coming in and going out is the cornerstone of any household budget. First, calculate your total monthly income: salaries or wages, pension income, child benefits, tax credits, investments or income from rental properties, and so on.

Next, tot up your monthly expenses. This will fall into approximately four categories: essential outgoings (mortgage, rent, bills, transport, childcare, food shopping), discretionary spending (toiletries, haircuts, going out), savings (future plans, rainy day funds), and occasional splurges (holidays, presents, new clothes).

Finally, subtract your expenses from your income. If you’re in the black, you’re on track. In the red? You’ll need to cut back. 

Keeping a spending diary for a month can help you identify where your money’s going and highlights where you could consider tightening the purse strings.  

Set up your budget

Your next job is to allocate specific ‘pots’ of money for different types of expenses: mortgage, utilities, regular Direct Debits (mobile phone, internet), food and drink, household supplies, running a car, entertainment, and so on. 

If you’re in a relationship, prepare to be challenged and be ready to compromise. Money can’t buy you love but it can lead to a heated discussion. Try to stay calm and focus on the big picture. 

Consider setting up two current accounts: essential household expenditures come out of one, discretionary spending from the other – this way you’ll never miss an important payment. You can also use a budget planner to keep an eye on your outgoings.

Schedule regular reviews

Reviewing your budget is vital. Once a week, make sure you’re on track for the month. Once a month, plan a full budget review – ideally always on the same day, so it becomes a habit. Don’t forget to allow for fluctuations in time of year and adjust spending or saving plans accordingly (i.e. for holidays and birthdays).

Committing to budget reviews means you know where you’re heading and can address any issues and make incremental changes as necessary.

Commit to paying off debt 

If your outgoings exceed your income, you’re in debt. Ignoring the problem might be tempting, but it won’t make it go away. Getting on top of your finances is essential.

The single biggest return you’ll get is to pay off your debts. Take stock of everything you owe, then commit to paying it all off, highest interest rate first. If you have multiple unsecured debts, you could consider consolidating them into one single monthly repayment – at a lower interest rate than you’re currently paying. It takes discipline and determination, but it’s definitely do-able. 

Finally, if you’re in debt but still putting money aside for a rainy day: stop. The rate of interest on saving accounts is likely to be far lower than you’re accruing on repayments. Pay off the debts first, then start saving for your future. 

Successfully managing a household budget comes down to setting up good habits and committing to them. A well-planned budget now could reap you rewards in the future: from getting yourself out of debt, to finding financial freedom in your daily expenses and saving for that once-in-a-lifetime holiday - totally guilt free.

  • Anthony Hua

    Anthony Hua,

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