Budgeting: the key ingredient to your financial success
Budgeting is a core skill which should be taught to every child from an early age at school. It is a critical habit to get right and to get used to doing regularly just like brushing your teeth daily is a good habit.
So where do you start? Well, you need to use a tool to put together a detailed list of your income and expenditure. At the most basic level, it could just be a pen and paper. However, it would be preferable to create a spreadsheet on a computer or a device. Better still you could use a personal finance app such as Money Dashboard which is free, Moneyhub which costs just £10 a year or MoneyInfo if you have a financial adviser who offers it to clients. Also consider Cleo, Plum, Emma and a recent one Snoop.
Personally, I use Moneyhub and my company Wealth and Tax Management will be offering MoneyInfo to our clients from mid to late February 2021. So what’s so good about personal finance apps?
Such apps are regulated by the Financial Conduct Authority and utilise Open Banking – the sharing of financial information electronically, securely, and only under conditions that customers approve of. They use feeds to download all of your banking information directly from your bank accounts as well as other sources such as investments and pensions. They automatically categorise your income and expenditure directly from your bank transactions though you do have to manually give a description for some of the transactions.
All of these apps offer budgeting and financial goal planning. They are very easy to use and can be accessed via mobile devices such as smartphones and tablets. The data is very secure.
Once you have worked out your monthly income and expenditure you should have a surplus. That is the amount you should save each month. Ideally, your monthly savings should be for various purposes such as retirement, deposit to buy a house, investment for capital growth, holidays, purchase of a new car etc.
It is important to set up regular monthly payments by direct debit or standing order because that is the easiest way to run a disciplined budget. You should always spend what’s left after your monthly automated payments have been deducted from your bank account. If instead, you save what’s left at the end of the month there is a much greater likelihood that there will be nothing!
Why do many people spend what they earn each month or more if they are using borrowings? Well, quite simply it’s because most people have unlimited wants and limited needs! Most of us like to have the latest and shiniest things. Buying such items is why most people struggle to save. By saving the money first and spending the rest you avoid this temptation. Deep down you know what I am saying is true, don’t you?
In my experience, many clients of mine who have mastered budgeting from an early age have mastered their personal finances, been able to retire early and enjoyed long, dream retirements free from money worries. Ironically the people who budgeted the most from an early age ended up being the ones who spent the most over their lifetimes but still had plenty of wealth to share with their loved ones when they died.
So do master the habit of budgeting and reap the rewards. You know it makes sense*.
*The contents of this blog are for information purposes only and do not constitute individual advice. All information contained in this article is based on our current understanding of taxation, legislation and regulations in the current tax year.
Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.