Budgeting |
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Your Money > Budgeting Articles > Five steps to...
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By Sarah Modlock
Step One - Look at the big picture You may be used to working out a budget every quarter. Or perhaps the closest you have come to money management recently was looking after the kitty on the last night out. Either way, it pays to take some time - as little as fifteen minutes - to work out how much money you have coming and going so that you can make the most of what you have. Sit down with bank statements (these can be called up on screen in you bank online) and make three lists of outgoings. The first should be a list of essential outgoings such as mortgage or rent, utilities bills, council tax, insurance, debts and so on. The second list is for everyday spending such as food, petrol, travel costs, clothes, newspapers etc. Finally, write down occasional spending such as holidays you have planned, birthdays, Christmas and any weddings or expensive projects such as home improvements. Take the total of the three lists away from your income. If you have money left then there is plenty you can do to make it work harder. If you are spending more than your earn then don't panic, there is a lot you can do to cut back and get things under control. Tip: It pays to hang onto all your bank and card statements and other financial documents. Keep them in one place so that it is quick and easy to go over your budget any time - and especially if your circumstances change. If you're in debt then make it a 2009 resolution to open all the post and take action rather than ignoring demands and problems. Step Two - Survive the longest month Many people get paid early in December, which adds to the festive mood and makes shopping easier. But the loooong wait until the end of January for your next paycheck can seem endless. So check your balance today, work out what payments and standing orders are still to be paid before your pay is due. If you're in danger of exceeding your agreed overdraft limit, contact your bank now to arrange a temporary increase and don't wait until it's too late and you've been clobbered with hefty bank charges. Moneynet.co.uk research reveals that if your bank pays an item for £100 taking you into unauthorised overdraft, bank fees and interest could cost you over £120 if you don't clear this debt in 7 days. Tip: January is a struggle but don't forget your credit card bills will fall due in February so try not to go nuts with January's pay cheque. Step Three - Spot ways to cut back Whether your bank balance is healthy or not, it makes sense to look at areas where you can save. Start by checking your standing orders and direct debits to make sure you're not paying for something you had forgotten about. Your spending lists should also provide clues to anything non-essential or comfort-spending. You may want to set yourself a cash budget each week, draw that out and try not to spend more. You may be amazed how much you spend each week on cappuccinos and muffins on the way to work and bottle of Pinot Grigio or Becks on the way home, without realising. Step Four - Review all your deals Unless you keep an eye on deals and packages, you will end up paying more than need to on everything from your mortgage to your broadband. Make use of comparison websites to shop around quickly. It's getting easier to switch all the time, too. Your mortgage - It used to be very easy to hop from one good rate to another. Not any longer. At the very least make a note in your diary of when to start shopping around before your current deal ends. This gives you a fighting chance of avoiding the dreaded standard variable rate. The more equity the have in your property, the more likely you are to be offered a fixed or tracker deal. Lenders will be more interested if you have at least 25% equity and the best deals are reserved for those with 40% or more. Even if you can knock just one percentage point from the cost of your mortgage this can still equate to large annual savings. For example, someone with a £150,000, 25-year repayment mortgage charging 5.5% could save almost £90 a month, or more than £1,000 a year, if they switched to a deal charging 4.5%. You may find that a mortgage broker can help and don't forget to check whether early-redemption penalties apply if you switch deals early. Your credit card - If you are not paying your balance off in full then now is the time to pay as little possible in interest. Weigh up the 0% transfer offers and remember that if you don't think you can clear the debt in the time given (usually a year or more) then the rate will jump the high teens and it will make better financial sense to transfer your balance to a low rate (around 6%) that is fixed for the life of the debt. You should also avoid making purchases on the balance transfer card as the rates for these are often uncompetitive and your repayments will be used to settle the purchase debts first. Juggling two cards could be cost effective but sticking to cash while you pay your existing card off will be a bigger help. Aim to pay as much as you can afford above the minimum repayment. If you are paying off your card every month in full without fail then cashback cards can provide rewards. Your loan - You may spot better deals but check the small print of your existing loan to find out whether there will be an early repayment penalty if you move your money. Look through applications very carefully to ensure you are not taking out a secured loan (putting your property at risk if you miss payments) instead of an unsecured one. Your bank account - Switching is easier than ever and if you are in the black, it makes sense to find the bank or building society that offers the best interest for accounts in credit, along with any other features you value. There are lots of new offers launching this month but make sure you read the small print and look past the gimmicks. The aim to is find an account you can stick with for a while. Your utilities bills - After your mortgage, council tax and utilities probably represent the biggest drains on your income. It's worth comparing prices often because rates change fast and cheaper deals, reflecting falls in the wholesale gas price, are expected to come on to the market soon. If and when you switch, the process should be smooth and most providers have a 28-day notice period but no exit fee. Whichever deal you chose, you will save money by paying by direct debit. It is also worth sending in regular meter readings as the estimated charges are often too high or low. The Energy Saving Trust's home energy check at energysavingtrust.org.uk can show you how to cut bills by reducing heat loss - crucial at this time of year when heating is cranked up to full. Your telecoms bills - It's easy to sign up and then forget when it comes to comms. Depending on what you use and how often, you may find that the best deal is a bundle which brings landline, broadband and cable under one tariff. Reasearch from Moneysupermarket.com indicates that two thirds of us purchase these as standalone products, missing out on savings of about £290. Your mobile bill should be reviewed regularly, too, especially if your pattern of use changes. Call your existing provider first to see whether you are on their cheapest tariff. Other ways to cut your mobile bill include opting for a 'sim-only' tariff - due to become hugely popular this year now that everyone has their own phone. As the name suggests, you get a new sim card to use in your existing handset. Pay-as-you-go customers can often find great deals from unexpected places - Asda and Ikea are among those who launched low-cost deals last year. Step Five - Bust debts/Build savings If you are in debt....Once you get your debts under control, you will have more options and less worry. Aim to pay off as much as you can afford. This is where you need to make some sacrifices and go back to basics. If you have any savings, keep some back for emergencies but use what you can to make a dent in the debt - the interest you are paying on the debt will far outweigh what you are earning on the savings. Make the debt as cheap as possible (see above) and don't be afraid to ask for help if you feel stuck or start struggling. Approach your lender before defaulting on any repayments and they should be willing to negotiate a manageable repayment plan. The Consumer Credit Counselling Service advice line (0800 1381111, cccs.co.uk) offers free, confidential advice. If you have money to save....Savers are not happy bunnies right now. Battered by the ever-shrinking interest rates (which banks are slow to pass to borrowers but swift to saddle savers with), you could be forgiven for thinking that you got no points for saving when others are in debt. Hang in there. Regular savers can still find decent rates on the high street - if you bank with HSBC then the Regular Saver account offers 8% up to a maximum of £3,000. If you can tie your cash up for a year or more then there are still fixed interest bonds to be had for at least 5%. Don't forget that your annual Isa allowance provides tax-free savings of up to £7,200 each year. You can save up to £7,200 in a stocks-and-shares Isa or a combination of up to £3,600 in a stocks-and-shares mini-Isa and £3,600 in a cash mini-Isa. Finally..... Keep up the budget reviews, deal reviews, debt repayments and savings and this time next year, the whole thing will be a piece of cake. Useful links: |
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