Which type of budget do you have?

When we picture a budget, we may imagine the Chancellor of the Exchequer holding up a red brief case outside 11 Downing Street.  Of course, the national budget is important as it provides a blueprint of any changes in taxation, government spending and forecasts for the UK economy.  Besides voting, there is very little we can do about the content of this budget.   The main budget that we have control over is our household budget, which will provide far greater certainty of our financial future, should we take control over it correctly.

There are only ever three types of household budget:

  • Spend More than you earn
  • Spend Equal to what you earn
  • Spend Less than you earn

Spend more than you earn?

If your budget sits in this category, it is likely that you will either be increasing your debt levels or depleting your savings on a regular basis.   If you spend more than you earn, you will find planning for future financial objectives more challenging. Paying for items that you want before you have the money will mean that over time you will end up paying for items you have already enjoyed. Quite often you no longer feel the benefit of continuing to pay for these items because the moment you benefited from them has passed.  This can lead to greater debt, less financial security, which can result in higher stress levels.

Spend equal to what you earn?

If you spend everything you earn, it can leave you vulnerable to emergencies where lump sums are required at short notice.  If you do not have financial reserves, unsecure debts (credit cards or high interest rate loans) may be required to assist with any short-term crisis.   The point in the month at which savings are put aside can often be the issue. Try to include savings as part of the budget for the month, which will reduce the chance of inadvertently spending your savings before the end of the month.

Spend less than you earn?

If you spend less than you earn, this provides you with the best chance to create a robust financial plan, feel in control of you finances, which can be empowering.  Once the budget has been formulated, provided you have a steady income, you will be able to draw out a timeline for when items or experiences become affordable.   You may also value your money more because you understand the time it has taken you to save it.

The basics of budgeting is ensuring you know exactly what income and expenditure you have, as well as anticipation of any lump sum expenses you will have over the next 12 – 18 months.  Once you know how much is entering and leaving your account, you can then scrutinise the expenses and prioritise accordingly, potentially reducing your expenses further.  The cornerstone of a good financial plan is your budget and can dictate when your dreams will become affordable.  At Wingate, we use sophisticated cashflow planning tools to ensure your goals are realistic and in line with your budget. Ideally the cashflow plan will demonstrate that you can meet your goals comfortably and even add to your list of aspirations without any guilt.

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