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How to create a budget and stick to it

By 12 March 2015 Money

Do you go from one day to the next not knowing whether your card’s going to be declined at the till? Is your bank account hovering on or below zero before the end of the month? When you first start working it’s easy to let money burn a hole in your pocket. You live month to month spending every penny but ten years later this probably isn’t the best way to carry on.

Creating a budget will help you to rein in your spending and put some money into savings. Even if you haven’t got something in mind that you want to save up for at the moment, creating a cushion to fall on when you need it is always a good idea. If you start putting away 10% of your earnings you’ll soon have a tidy sum that can turn into a house deposit or tide you over should you lose your job. Afterall, you only have as much job security as the length of your notice period.

How to create a budget

The first step in planning a budget is to look at your outgoings by going through past bank statements. Take a look at your direct debits and see what you’re paying out on a regular basis. I find it easier to budget on a monthly basis so if you have any annual or quarterly bills, work out how much these equate to per month.

This is what I have in my outgoings:

  • Rent
  • Bills
  • Water
  • Gas
  • Electricity
  • Council tax
  • Phone/Internet
  • TV Licence
  • Contents insurance
  • Car insurance
  • Travel / fuel
  • Grocery shopping
  • Mobile phone
  • Bank charges (I have an added-value bank account that has a monthly fee)

A few years ago I spoke to someone at a debt advice company who helped me put together my budget. I already had one but wasn’t including some items that the women suggested I should be. These were clothing and health and dental care. Even people who organise IVAs don’t expect you not to buy new clothes from time to time. I think they suggested £20 per month, so we’re not talking designer labels here, just subsistence items. I didn’t even think about health or dental care because I don’t often go to the doctor or dentist and don’t have regular prescriptions, however accounting for these costs, perhaps putting the money aside, is a sensible idea. We created a contingency account that we pay into each month to cover this sort of thing. You don’t want to put the cost of that root canal on your credit card, do you?

Once you’ve worked out your regular, essential outgoings look at your income and work out the difference. This will tell you how much you can afford to save and how much you have to spend. Ideally, you should aim to save 10% of your earnings but this will obviously depend on how much you earn versus what your outgoings are. Nobody want to save all their residual income. Life would be very dull.

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To help you create your own budget, I’ve created this blank budget template that you can copy and paste into your own spreadsheet or download in the format of your choice (in Google Sheets, click File, Download as).

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The formulae are already in there so all you need to do is fill in the rest. This budget template is based on my own spreadsheet. Once you’ve created your own, feel free to adapt it as you see fit. It’s got to work for you, otherwise there’s no point. In my spreadsheet, I have an extra column for my husband and a column that adds up our two columns. This works best for us because we split the cost of the bills and the idea is to both be paying roughly the same out each month.

Once you know how much money you have to spend each month and week, think about how you are going to stick to this. If you can trust yourself to keep a mental note of your spending then fine, but personally that’ll never work for me. When I was saving up to go travelling I only gave myself £25 per week spending money. I did cheat occasionally as I decided that if I had to buy something that was to be used while travelling it didn’t count. Oops!

I took out the £25 cash and left my cards at home. It’s amazing how much less you can spend when you physically have to hand the money over. Plus you can always see how much you have left for the rest of the week. Another option is to open a second current account and transfer your spending money over monthly and only use that card. If you choose this option, setting up regular mobile alerts with your bank account balance would be a great idea. I know my account with Lloyds Bank lets you do this, I don’t know about other banks but most, if not all, have mobile banking apps anyhow so you can regularly check your balance.

Budgeting tips

  • Don’t try and cheat your budget, you’re only cheating yourself at the end of the day.
  • Be honest about your outgoings and what is essential. You might think you need that £3 Starbucks each morning but this should really come out of your spending money rather than be included as an outgoing.
  • If you have debts, concentrate on paying these off first before saving money. It’s pretty pointless to put money into a savings account when you’re paying interest to a creditor.
  • Set up a standing order so that your savings come straight out as soon as possible after pay day. This means that you’ll be used to not having that money and won’t even think about it.
  • If you don’t think you can trust yourself to dip into your savings for something less than essential, consider a savings account that is not instant access. Some accounts you have to give 30 or even 60 days notice to withdraw money. This is ideal if your savings goals are long term but if you’re putting money away for emergencies this probably isn’t a good idea. There are accounts that are instant access but you are limited to how many withdrawals you’re allowed each year, maybe check those out.
  • If you want to understand where your money goes each month, an insightful exercise is to go through your bank statement for last month and put everything into categories, e.g. food, clothes, coffee, eating out. This can help you to identify areas where you can make savings. Which leads onto my next tip…
  • Look to reduce your outgoings. Check that you’re on the cheapest tariff for your energy bills, shop around for your broadband supplier and home insurance, and if you’re always buying branded groceries try some alternatives and see if you notice the difference. There are only a few branded things I swear by, one is Fairy Liquid Platinum (the best washing up liquid around!), but otherwise I’m usually happy to buy the supermarket own brand.

Creating a budget can seem like a boring thing to do but it really does help. Sticking to your plan is the most important thing. Whether you want to be debt free, travel more or buy a house, budgeting can actually change your life.

Share your experience of budgeting in the comments below. I’d love to hear from you.

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What’s a cash ISA and should I have one?

By 26 February 2015 Money

A cash ISA, or individual savings account, is a canny way of saving money without have to pay tax on the interest. Basic rate taxpayers lose 20% of their interest on regular savings accounts in tax, and higher rate taxpayers lose 40%. That’s £20 or £40 from every £100.

With interest rates on ISAs hovering around the 1% mark, if you have £1,000 in your pot you’ll only be looking at £10 interest. If your money wasn’t in an ISA, you’d stand to lose £2 in interest. £2 isn’t a lot of money in the grand scheme of things but why should you let the taxman line his coffers anymore than he currently does? Plus, that £2 is based on you having £1,000 of savings. Once you start to add to this, the tax you have to pay only increases.

If you’re lucky to have £30,000 in savings (perhaps you’re saving for a house deposit) that 1% interest turns into £300 and the tax owed becomes £60. Again, this is for basic rate taxpayers. If you’re a higher rate taxpayer, you can double your tax bill.

So how does it all work?

All UK residents aged over 16 get a tax-free ISA allowance, which is the amount you are allowed to save in your ISA in one tax year. The tax year runs from 6th April to 5th April the following year.

This tax year, the individual ISA allowance is £15,000, and from 6th April 2015 that’s increasing to £15,240. There are both cash ISAs and stocks and shares ISAs. We’re just going to talk about cash ISAs here.

The allowance doesn’t roll over so if you don’t use your whole allowance in one tax year, you lose it. This allowance is also the maximum you can pay in during the course of the year and it doesn’t reset if you withdraw any funds. So if you pay £7,000 in over the year but withdraw £3,000 to buy a new car, you still only have £8,000 allowance remaining that tax year.

Why open a cash ISA?

The interest rates on savings accounts right now are pretty dire. Being able to keep 100% of your interest using your ISA effectively means you can earn more interest than in any other savings account. As a basic rate taxpayer, you’d have to find a regular savings account that pays 2.5% interest, which isn’t very likely. If you do see an account offering tempting interest rates, check they’re not just “teaser” introductory rates that fall off a cliff after the first year.

You are entitled to use your entire allowance each year and continue to benefit from the tax benefits and interest earned until you withdraw the cash. If you squirrel away money every month and can resist touching it you could accrue a huge savings pot and not have to pay a penny of tax on it. Kerching!

Cash ISA – key facts

  • There are lots of different cash ISAs to choose from including:
    • Instant access, which is ideal if you need to be able to get hold of your money at the drop of a hat
    • Regular savings that require you to save each month
    • Fixed rate means that the tax-free interest rate is fixed for a certain amount of time. This is perfect if you’re saving a lump-sum as you’ll know how much interest you’re going to earn and can easily compare ISA providers.
  • Many cash ISAs can be opened with as little as £1.
  • Restricting the access to your money can give you better interest rates, for example some accounts with require 30 days’ notice that you want to withdraw some cash.
  • ISAs are offered by banks, building societies, credit unions, the Post Office and others. Don’t feel you have to open your ISA at the same bank as where you hold your current account. Although some banks and building societies do offer preferential rates for their existing customers. Shop around for the best deal.
  • You can only pay into one cash ISA per tax year
  • It’s not possible to have a joint ISA. Individuals have their own allowance, which can’t be pooled.
  • If you have to fill in a tax return, you don’t need to declare any ISA interest.

Should I have an ISA?

The simple answer is, why not? If you have any kind of savings account, it’s not likely you’ll be earning much interest on it. Moving that cash into an ISA means you can grow your savings without losing a penny to the taxman.

If you’re the kind of girl who puts money is their savings account every so often, perhaps for a ‘rainy day’, but then finds that it’s pretty rainy quite often (like me!), an ISA probably isn’t going to do much for you. You’re only really going to benefit if you’d normally be paying tax on your interest and you can only earn interest if you have money in your savings account. 1% of nothing is a big fat nothing.

If on the other hand you’re more disciplined with your money, an ISA could be ideal for you.

What are you like at saving? Do you have any tips to share? Leave me a comment below!

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