Budgeting and clearing debts.

I have worked with my own finances and that of my mother in great detail. I helped my mum to get out of the debt spiral she had fallen into and entirely change the way she dealt with her money.  Since then many friends have asked me for advice on how to begin to achieve the same for them, so I thought I would share a few tips. When better to start to get a handle on your finances than the new year?

Firstly, know what your essential bills cost. All of them. Work it out on a weekly basis for everything, whether paid yearly, monthly or otherwise. Include groceries, travel (fuel/car tax/insurance/mot/service/public transport/car repairs) as well as everything else.

Secondly, know what your total income is, from all sources. Again work it out on a weekly basis.

With any luck, the second figure will be the same or larger than the first. If not you may need to look at cutting down costs or increasing income (I will write a blog about this in due course).

Lets say the second figure is larger by £50 a week (or whatever figure it was), you should then allocate a portion of this to savings or paying off debts (overdrafts/credit cards etc). In this example, lets say we’re going to keep £20 a week for that.

Set a particular day of the week, Monday is good, and on that day you will withdraw the remainder of your weekly income (in this example the remainder is £30). That is your ‘extras’ budget for the week. That’s it. No more. The rest is already accounted for, for bills etc.

Have a safe or money box at home, anything left from that ‘extras budget’ goes in there each week, this becomes your ‘extras savings’.

Be strict when doing shopping, take the budget for groceries out each week/fortnight/month and only spend that in the supermarket. Anything left can either go back in the bank for savings, or into the ‘extras savings’ pot.  Some find it cheaper to shop fortnightly instead of weekly, or online instead of instore, either way the same rules apply. Again, I will talk more about groceries budgeting in another post.

Open at least one savings account with your bank, all of your extras left in each week should go in there so you can see it building up.

It depends on the difference between figure one and two, but you may find you have sufficient to ear mark a certain portion of your savings for a holiday or big treat. It’s best to also have a separate savings account for this.

Make sure the weekly portion left for savings or debts is not squandered or used and general spending. If you have an overdraft or credit cards use the extra each and every week to pay a bit off. If you have 4 such debts, each week pay a bit off each (this is in addition to any minimum payments). Or choose the one with the highest interest and clear this first.

Be strict with yourself and your budget. Keep savings separate from bill money. Make sure you factor in yearly bills as well as a reasonable amount for clothing/birthdays etc. Pay what ever you can monthly (unless it will cost you more). Things not paid monthly to the company, pay monthly into another ‘bills’ account if that helps you to keep it seperate.

Do seek help from a debt charity if you are struggling or your income is smaller than your costs.