Budgeting - Tips on Budgeting

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Budgeting Explained
Tips on budgeting

Budgeting Explained

Budgeting is easy to explain but not easy to do. The objective is to make our expenditure less than our income over a period of time i.e. it is an estimate of income and expenditure for a future time period. Some weeks we will need more money e.g. for birthday presents or holidays, therefore we must save during the other weeks of the year. This needs:

    * Self-discipline to avoid spending
    * Knowledge on how and where to keep the money so that it is safe and doesn't loose its value.

Personal budgeting helps consumers allocate resources sensibly:

    * Decide on period of time the budget would cover
    * Estimate income over that time
    * Estimate spending
    * Estimate amount to save
    * Cut spending or cut savings or borrow

The higher the level of a person's income, the more they spend. A major factor in determining expenditure is the number of wage earners in the household and all members living in a particular dwelling. High-income households tend to have more than one wage earner in the household whilst low-income households tend to have no wage earner in the household. The higher the income, the higher the savings tends to be.
 

Tips on budgeting

At the moment you might not pay much attention to the Chancellor's budget speech in the House of Commons - unless he happens to raise the price of something that you spend your money on. Taxation is the Government's way of getting its income. It uses the money it raises to provide essential services like education, health, defence and social services. The Chancellor's job is to balance the amount he gets from taxation with the amount the Government plans to spend. This process of planning income and spending is known as budgeting.

Personal Budget

Most of you will already have an income in the form of pocket money. You may have other earnings from weekend jobs or newspaper rounds. Later on when you leave school you may go into full time employment, or get a place on one of the Government's training schemes. Whatever the source of your income, it will probably be fairly low to start with, so careful budgeting is very important.

Why You Need to Budget

There are 3 steps to budgeting: -

    *   Knowing your resources.
    *   Keeping spending records.
    *   Drawing up a spending plan.

Knowing Your Resources

First of all you need to know how much of your income is actually yours. If you're receiving only benefit or a training programme allowance then you'll keep the lot because these aren't taxable, but if you have a job you will have to pay income tax. This will automatically be taken out of your pay by your employer by a process called Pay As You Earn or (PAYE for short). It really means that you don't receive the gross pay that you were offered when you took the job. Instead you receive your net pay which is the amount left over after deductions. Other deductions likely to be made are:

i) National Insurance contributions, this pays for things like sickness benefits and state pensions.
(ii) Pension Scheme contributions, your employer may offer a separate pension scheme.
(iii) Trade Union contributions.
As a rough estimate you can reckon to lose up to 25% of your gross pay when you start to earn from a full-time job. At the end of each week or month you will receive a pay slip. It tells you what deductions have been made and how much you are getting to take home - your net pay.

Keeping Spending Records

Like it or not, your net pay will be reduced even further by bills that you'll have to pay. Some of these will be fixed; you might give your parents a set amount towards your keep; you might have to pay a weekly lodging allowance; you might have bought something on H.P; you'll have travelling expenses. All of these things have to be accounted and allowed for. When you set up your own home you'll have to pay rent, gas, water and electricity bills, telephone bill or T.V. licence. You need to work out how much your bills are likely to come to and then put enough aside each week or each month to cover this total cost. This is the money that you are keeping in reserve.

Drawing up a Spending Plan

After you have set money aside in reserve from your net pay to pay for all your likely bills and have allowed something for daily food and travel, what's left is yours. You'll probably want to spend some on clothes, on make-up, entertainment, maybe a motorbike or car. Whatever you choose remember that it pays to shop around. Don't buy on impulse - think very carefully before handing over your hard-earned cash. Compare prices; find out as much information as you can. If you're planning on buying a large item, like a stereo or motorbike, then it's even more important to get it right first time. Since it's unlikely that you will have saved enough to buy things like this outright you'll probably have to think about buying on credit.

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