Budgeting means keeping track of your money, and involves identifying your income (money coming in) and spending (money going out), and using this knowledge to make plans.
Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery. Mr Micawber in Charles Dickens David Copperfield.
We can measure how much money we have in two ways.
Firstly we can measure our income and spending. This is the money we receive and the money we spend in a given period of time, say a week or a month. This is the measure we are most concerned with when budgeting.
Secondly we can measure the total amount of money we hold at a given point in time. This is calculated by adding up all our money, plus the value of all the things we have, the total is known as our assets. We then have to subtract any money we owe to other people; this total is known as our debts or liabilities. The difference between the two, if it's positive, is our net worth.
Calculating our income means adding up all the money we have coming in over a given time period, weekly or monthly.
For most people their main source of income comes from their job.
If you are employed you will usually be paid a fixed wage per week or month, although this can vary eg if you work variable hours or if you're paid commission, eg a percentage of sales made.
If you are self-employed your profits will vary more and may depend on the time of year, eg ice cream shops usually make much more in the summer than the winter.
The best way to calculate income from your job is to work out how much you earned over the past year, after taxes, and then take an average per week of month. Don't forget to take account of any changes such as changing job or getting a raise – in this case you're average will need to be based on your current working situation.
In addition to money you earn you may have other income, eg interest on savings or dividends on investments, or perhaps you get cash gifts from relatives for birthdays or Christmas. Again average these out over a year.
A good way to do this is by checking your bank statements for the past year, but don't forget to include money that isn't paid in through your bank, eg any earnings received in cash.
For most people spending is a lot harder to work out than income because we spend money in many more ways than we receive it.
Like income, a good place to start is with your bank statements.
If you don't regularly check your statements (you should always check your statements) you may find you're paying for things you don't need. The classic example is joining a gym as a new year's resolution to get fit, only going for a few times, but forgetting to cancel the monthly subscription.
Like income, your spending will probably vary from month to month, eg heating bills are more in winter, and there will be one-off annual payments, eg car insurance. Again, as with your income, you should average these expenses out over a year, and don't forget to take account of changes like cancelling an unused gym membership.
We often spend lots of small amounts in cash that can be difficult to add up, these are things like buying a coffee and a newspaper on the way to work, a sandwich for lunch, putting small change in a charity box etc.
If you draw your cash from the bank you will be able to see the total amount of this daily spending from your bank statement, but it won't show the detail. It can be worth keeping a detailed record of everything you spend for a week or so, even making notes in a pocket book, as this can be helpful if you're trying to make savings as small but regular spending can quickly add up. Eg you may find that not spending £1 a day for a morning coffee would save you £250 a year! (5 days per week for 50 weeks a year). This doesn't mean you have to give up your morning coffee, but at least you'll be aware of how much it costs.
Do you check your bank statements?
If you don't then you should, for 2 reasons:
Ideally you should receive and check your bank statement every month. If you receive one less often, it's worth asking your bank for monthly statements.
These days many banks allow customers to view their statements online. This can be a quick and easy way of keeping a check on your money. Even if you view your statements this way it's still a good idea to print them out so you have a paper copy to file away.