How to manage a home budget – Financial Management – balancing act

How to manage a home budget

A 6 minute read • Simon Q

Part of our financial management series. Here at we don’t give financial advice, but we do offer some tips that you can consider when deciding how best to manage your money.

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If you’re lucky enough never to worry about how much money you spend then you are probably doing something right! But most of us need to keep a watch over our outgoings and ensure we don’t fall into debt that we struggle to pay back.

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Perhaps you want to save for a wedding, to put a deposit on a home, or for a trip of a lifetime. Managing a budget takes a little effort, but it can help you achieve your goals. It’s about being methodical, disciplined and flexible. It’s also about understanding how to set priorities and manage trade offs.

You need to know your income and outgoings

Too obvious a statement? Maybe, but this is the first stage of setting a manageable budget and you can’t do that without knowing what comes in and what goes out.

How to manage a home budget – Financial Management – photo of gold piggy bankIt’s usually best to work to a yearly budget that’s broken down monthly so you can spot patterns and trends in your income and spending. And aligning the year start date to the tax year can be helpful if you have to complete a tax return.

Calculating your total income is easy: include your regular salary and any bonus or commission you are certain to get. If you’re fortunate enough to have investments, income such as dividends on shares and interest on savings can add up to a useful amount of money, so add a realistic estimate for these too.

Now you need to look at your outgoings.

Before reviewing your outgoings

Calculating your outgoings is more complex, and best done over a period of time. I suggest you invest the time to review a full year (the previous 12 months) of spending so you can be certain you captured the level of detail you need to make adjustments and trade offs as you review your budget. Ideally, you might think about reviewing your budget quarterly.

“Review a full year of spending so that so that you can be certain that you captured the level of detail you need”

Most banks and card companies allow you to export your account transactions to a spreadsheet and this can save a lot of time. Some also offer apps that produce graphs of your spending using automated categories and these can be helpful in reviewing your outgoings. Include your current account, credit cards and any other spending you have.

Before we get into the detail of how to choose categories and calculate your outgoings, here are a few tips:

Suggested priorities

  • Think about tagging certain types of spending as Essential, such as mortgage or rent payments. This will help you set priorities
  • You can attribute tags to specific types of spend that you feel offer good return or health benefits; examples (for me) are gym membership, Netflix subscription, and a music streaming service. Some of these may be non-negotiable when you have to look at trade offs so let’s tag them as Gold spending
  • Be ready to think about what a Reasonable level of spend could look like so you can decide how much money you need to be comfortable and happy
  • Think about what you would include in a Survival budget that will keep you fed and sheltered should your plans not work out

Put your outgoings into categories

If you group your outgoings you’ll be in a good place to work out how to make trade offs and adjustments if your finances change for better or worse. It will also help you spot trends such as stealth increases imposed by third parties like insurance companies.

This is usually best done using a spreadsheet so you can do the calculations in an instant and make changes that update automatically. Depending on your circumstances, tally up a total for each of these suggested categories as well as separate line items for the relevant sub-categories.

Suggested categories

  • Housing – include your mortgage or rental payments, insurance, local tax, utility bills, telephone and broadband, repairs, decorating and furniture. Much of this will be Essential outgoings that you need to make a high priority
  • Shopping – include your groceries, toiletries, household items and what you need for day-to-day living
  • Childcare – if you have young children, include everything you need to bring up your baby
  • Personal items – include clothing, shoes, perfumes and items you buy infrequently
  • Loans – include payments for any other borrowing you have from banks, friends and family or credit cards. If you need to borrow money or do not pay off your credit card balance each month, please read our article on responsible borrowing
  • Car – this could also be a motorcycle. Remember to include loan payments, insurance, road tax, servicing, expected repairs, petrol and other motoring costs
  • Home entertainment – books, magazines, music and movie downloads, Netflix, Apple TV and Amazon Prime (other entertainment offerings are available!)
  • Gadgets – include your computer, mobile phone and other gadgets with their associated costs in here
  • Going out – include movies, eating out, drinks with friends, theatre, gigs, etc.
  • Holidays & travel – this includes holiday travel (flights, rail fares, car hire), holiday expenses (food and drink), travel insurance, days out and weekends away
  • Health & fitness – include gym and sports club memberships, massage, medicines and dental and optical costs. You may see this as Gold spending that you consider a good return on the investment, or even Essential
  • Gifts – for birthdays, Christmas and weddings etc.. This is a useful category as it’s an easy trade off that helps you easily to reduce outgoings if things get tough
  • Miscellaneous – include anything not already covered. These could be charitable donations, memberships, lessons or training you pay for
  • Savings – if you are able to save money from your salary then include it here

If I have missed anything that’s relevant to your life then just add it into the most appropriate category.

Putting together your budget

Once you have pulled together the total cost of your outgoings for a full year, you’re in a great place to start putting together your budget. Ideally, your annual income will be greater than your annual outgoings and you can save some money each month. But if that’s not the case, don’t panic and there’s usually plenty you can do to balance the books.

You need to decide how much money you are prepared to spend on each category. If your income is greater than your outgoings then you probably already have the data you need and can decide if you want to increase your spending in some areas or save more money than you do currently.

How to manage a home budget – Financial Management – managing prioritiesIf your outgoings are greater than your income, you need to make some changes as this is not sustainable without an increase in income. We’ll explore your options later in this article.

Having a monthly total for each category is useful – it’s more manageable and allows you to see trends over months and years – and to work out the best way to rebalance your spending.

By using tagging you can also highlight Essential and Gold spending that you probably don’t want to consider including in any trade offs.

If you are feeling particularly adventurous with your spreadsheet then having a ‘run rate’ column that shows how your spend to date tracks against the annual budget is really helpful. Ideally you want to see a run rate of 100% or below to show that you’re on track. If your run rate is higher than 100% then you many want to consider making some adjustments or trade offs.

Making adjustments and trade offs

I have mentioned trade offs more than a few times so it’s time to look at how this works. I also suggested that you review your budget quarterly. Let’s imagine your home entertainment spend is 150% of what you expected it to be at this point (according to your budget) and it’s only three months into your new budget year. You need to ask yourself a few questions:

  • Did you assess your spending correctly, miss something you have paid for or make an error on your spreadsheet?
  • Was your home entertainment budget unrealistic to start with?
  • Have you ‘front-loaded’ the spend and will spend less than you predicted during the rest of the year thereby balancing the expected spend over 12 months?
  • Can you afford to absorb this projected overspend and increase your home entertainment budget?

If you expect to see an overspend at the end of your budget year and cannot absorb the increased costs then you may need to make a trade off to balance the books. You could look at a few options:

  • Reducing spend within the home entertainment category over the coming months
  • Reducing spend in non essential categories such as gifts and eating out so that the overall budget balances – a true trade-off
  • Reduce the renewal cost of utility bills and insurance by haggling with suppliers (you should be doing this anyway). They are usually responsive to haggling so take a look at our guide to haggling for a great deal

As you carry out this sort of review of your spending, you will need to take into account what could change over the coming months. Are you due a pay rise that will allow you to increase your budget? Do you feel confident enough to ask for a pay rise? Do you plan to move home or get married and incur some large costs? Certain changes such as these will help you make the trade offs you need to manage a budget successfully.

Six steps to managing your home budget

  1. Add up your income and outgoings for the last 12 month
  2. Arrange your outgoings into categories and tag each with a priority
  3. Use a spreadsheet to calculate monthly and annual totals
  4. Decide how much you want to spend in each category
  5. Review your budget quarterly
  6. Make adjustments and trade offs

And finally

Thanks for reading. This can seem like a complex topic and I have tried to make it as easy to understand and implement as possible. I hope that I succeeded.

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