Personal Finance - Budgeting - part 2

What Period Should I Budget For?

Whether you budget weekly or monthly is a matter of personal preference

These days many people get paid monthly, and many bills are due monthly, which makes it tempting to budget monthly.

However, I prefer to budget weekly, for 2 reasons:

  1. A week is shorter, and (for me) easier to visualize in my mind. If there's a problem it's faster to spot it and do something about it.
  2. Weeks are always the same length (7 days), months are not - so the math is easier.

If you get paid monthly you've probably noticed there isn't always the same time between pay days, which, if your budget is tight (ie your income and spending figures are close) can be a problem.

Many people withdraw money or do their main shopping on the same day each week, eg many people like to withdraw money on Fridays so they have spending money for the weekend. This is a good idea as it's easier to keep track of your spending than if you frequently draw small amounts at irregular times through the week. But it does mean that if you're paid monthly there will sometimes be 4 and sometimes 5 main withdrawal days in a “pay” month.

The easiest solution to this is to work out what your wages are as a weekly figure and make sure you spend no more than this in a week. This means in a "4 week" month you'll save a little of your salary to cover the extra you'll need during a "5 week" month.

Converting Weeks to Months

How many weeks are there in a year?

If you're like most people you'll say 52. And you'd be almost right. But not exactly.

Taking account of how long it takes the earth to orbit the sun, and how leap years are calculated, it turns out there's actually an average of 365.2425 days in a year, which makes 52.1775 weeks.

Does it matter? Well, when it comes to budgeting, yes it does.

Suppose you earn £5,200 a year (after taxes). You might think you can spend £100 every week. But actually you'd end up spending £5217.75, which is more than you earned.

To be on the safe side it's always best to count income as a little lower than it actually is and to count spending as a little higher eg:

Weekly income = Monthly income x 12 / 52.2

Weekly cost = Monthly cost x 12 /52

So if you earn £1000 per month you'd work that out as £1000 x 12 / 52.2 = £230.76 per week (rounding down)

And if you spend £50 per month on club membership you'd calculate that as £50 x 12 / 52 = £11.54 (rounding up).

That way you'll always have a few pennies extra in your pocket at the end of the year, which is better than not having quite enough to pay an important bill!

Cards - a double edged sword

These days many people use credit and debit cards to make purchases.

Debit cards allow you to spend money from your bank account without withdrawing cash or writing a cheque. When you use a debit card the amount you spend is deducted from your bank account immediately (or almost immediately). If you don't have sufficient money in your account you will go overdrawn and have to pay charges to your bank.

Credit cards are effectively borrowing money. You buy something today and pay forit at some point in the future (along with the interest charged). Many credit cards give you an interest-free period if you setle your bill in full each month.

Cards can be a really convenient, because you don’t have to carry large sums of money, and you can buy things even if you don’t have enough money in your wallet. They also allow you to buy things online with just a few clicks of your mouse.

But, cards can make it too easy to spend money. Psychologically it’s much easier to hand over a card and punch in a PIN number than handing over hard cash. And, unless you’re really good at record keeping, it’s easy to lose track of how much you’re spending.

If you find you’re running up increasing debt on a credit card it probably means you’re over-spending and it’s time to do something about it.

So, use cards carefully. They do make life easier, but it’s really important to keep track of card spending and to remember that money spent on a card is still money spent.

Allowing for Contingency

Contingency means what happens if things go wrong.

Financially this means keeping some money aside in case you have an unexpected expense.

Eg: if you’re a car owner, you might need to get your car fixed; if you’re a home owner, you might need to get your house fixed; if you work, you might lose your job, or maybe become unable to work for a while.

As a general rule it’s a good idea to aim to keep at least 6 month’s salary aside in case of emergency. So, if you earn £200 a week, you should have around £5,200 available.

Alongside your contingency money you also need to save for infrequent payments like car insurance etc.

Eg: if your car insurance is £300 a year, you need to save around £6 a week  (or £25 a month) to cover the bill when it becomes due.

This money should ideally be kept in a savings account that pays you interest. Shop around in the Internet to find the best deal. But remember, because you could need this money at any time, make sure the account allows you to withdraw it without notice.