Cost of living crisis: how to create a budget and stick to it
Nine in 10 people have seen an increase in their cost of living in the past month, with a quarter of people saying it was hard to pay their essential bills, according to Bank of England research.
Inflation has hit 7% and is now expected to reach double digits later this year. A lot of this is driven by rising energy costs, which are hitting people’s household bills and the cost of filling up their car. But people are also seeing an increase in their food bills, travel costs and almost every other area of their spending.
Now is a good time for anyone worried about their finances to put together a budget, analyse how they spend and set limits, so they are not spending more than their income. Even if you still have plenty of breathing space between your income and outgoings, it’s a good idea to periodically look at where you are spending money and how you can save some cash.
So here is a plan of how to set a budget and (crucially) stick to it.
Step 1: Look at where your money goes
Before you can set a target, you need to know what you’re spending your money on. This involves downloading the last couple of
months of bank statements for any credit cards or bank accounts and categorising where your money goes.
You can be as specific as you like, but broad buckets of food spending, energy bills, other bills, entertainment, travel, rent/mortgage, loan or debt repayments, and miscellaneous will probably be sufficient for most people.
You then need to set this against your household income. If you are spending more than you earn, then you need to make changes. Slipping into your overdraft every month or not paying off your credit card in full might not seem like a big deal, but if you continually spend more than you earn, you’ll just get further into debt with no way to pay it off.
Step 2: Cut the cost of your essentials
Some things you just can’t eliminate, such as car insurance, energy bills or phone bills. But you can look at whether you’re paying over the odds and if you can cut the cost of the bills.
For many of your essential bills if you haven’t switched provider in the past year or two you could probably get a cheaper price.
For example, lots of people let their mobile phone contract roll over at the end of the term, but they could get a far cheaper deal by getting a new SIM-only contract and keeping their handset.
Alternatively, if you haven’t moved car insurance provider recently, you could likely get a cheaper deal by shopping around. Comparison websites have made this process much easier.
One big area where people often overpay is their TV and broadband package, which will often increase dramatically in price each year but go unnoticed by many.
Call up and haggle for a better deal or switch to a new provider. Lots of people think it’s a lot of hassle to switch providers, but various switching services streamline the process.
Step 3: Work out what else to cut
Listing out all your spending can be an eye-opening experience, as lots of people will be spending far more on certain areas than they realise. Looking at the amount you spend on different areas will also highlight specific places where you’re overpaying.
If you still have a shortfall between your income and outgoings you need to work out where to make that saving. This will be a personal preference as everyone has different priorities. One person might be happy having fewer nights out or trips to the pubs, while someone else might want to keep hold of them but shop in a more budget supermarket or cut a streaming service.
Step 4: Claim any free money
Lots of Government help and benefits go unclaimed, and people could bolster their income by claiming the support to which they’re entitled.
For example, any parents should check whether they are eligible for child benefit or for tax-free childcare, if they have childcare costs.
Couples where there is one basic-rate taxpayer and the other a low earner or non-earner should see if they are eligible for the Marriage Allowance (and backdate their claim). Lots of people are also eligible for council tax discounts, either due to their low income or because they live alone or with children.
For lower-income families there might be a whole host of other benefits they could claim that could have a big impact on their budget. There are free benefit checker tools online that will give you an idea (never pay for these services) or you can go to a charity like Citizens Advice who will help you work out what you’re owed.
Step 5: Set a new budget
Now you’ve cut the price of some of your bills, potentially bolstered your income and worked out where you can make other cost savings, you can set budgets for each area of spending in your life.
This will help you to keep on track and avoid accidentally overspending in certain areas each month. It’s important to set realistic targets, as if you set unrealistic goals and then continually overspend, you’ll likely throw the whole budget out the window.
You also need to factor in occasional or one-off payments into your monthly budget, so these situations don’t throw you off course.
For example, factor in Christmas costs, holidays or birthday presents. If you have kids think about school uniforms or buying new clothes a few times a year, and if you have pets think about any vet bills.