Whatever your income, if you spend more than you earn, you will find yourself at best with debts to repay or – at worst – in court. In order to avoid accumulating debt, many people find it helps to draw up a budget so that they can keep on top of their finances, and avoid overspending.

I don’t have any book keeping skills, is it easy to draw up a budget?

A simple personal budget is quite straightforward. But you do need to keep to it!

Where do I start?

Ideally, you will need recent bank statements covering at least a month and, if possible, the last year’s utility bills – telephone, gas, electricity, council tax, water rates, car tax, insurance and any other bills which you pay at intervals during the year – together with a large blank sheet of paper.

Alternatively, you could use the Money Advice Service’s Budget Planner, or ask your bank if they can supply you with a pre-printed “Budget Planner”. These are normally free of charge.

What do I do next?

Start by looking at expenses (outgoings). List all your bills from the past year and add them up to form your total annual bill expenditure. Where bills are received on a quarterly or annual basis, mark the month(s) the bills are due for payment against the entry. Don’t forget bills that are paid direct from your bank account such as mortgage and loan repayments, and include an amount for entertainment, meals out and any holidays and/or weekend breaks. Also, don’t forget to allow for Christmas and birthday presents and for the unexpected expenses, such as a car or washing machine breakdown. When you have arrived at the total amount paid last year, add, say, five per cent to allow for increases during the coming year.

Then what?

Now list your expected income for the year. Include wages, any child or social security benefits, pension payments and any savings account interest or share dividends. Be realistic. If you regularly earn, say, ten hours overtime a month, include this, but if the overtime is not certain, leave it out of your calculation.

Your total income should be more than the total amount of your bills. If it isn’t, you need to take action to reduce those bills now. As a first step, you may be able to reduce your spending in areas such as phone calls, cigarettes, alcohol, new clothes, entertainment and holidays.

But I get paid monthly, not annually.

Once you have balanced your annual budget, divide the total annual amount of bills by 12. This, in theory, is the amount you need to put aside each month to cover your bill payments. If your bills are evenly spaced throughout the year, this will be all you have to do.

But my bills aren’t evenly spaced throughout the year. What can I do?

This need not necessarily be a problem provided you have balanced your annual budget. You now need to draw up a monthly budget using the information you have already written down. Assume that the month runs from one payday to the next. Taking each month separately, list the bills becoming due during that month in the same way that you drew up your annual budget. Compare the total amount for each month with the theoretical monthly amount you need to put aside. Carry over any surplus from one month into the next. You may find that this shows that any individual month’s shortfall will be covered by ‘overpayments’ from previous months.

I’ve done that, but there are still a couple of months where there is a shortfall.

First, look at the bills which are not payable regularly each month such as gas, electricity, telephone and water rates. Ask whether you can pay these monthly instead. If you can, arrange for the standing order or direct debit to be paid from your account just after payday. This will make it easier to ensure that there is enough money to pay them. Draw up your monthly budget again using the revised timing. You may well find that this solves the problem.

I’ve done that as well, but I still have a shortfall for some months.

Calculate the amount of the shortfall and the month it becomes due. You will need to ensure that you inject enough cash into your account by that time to avoid going overdrawn. Alternatively, arrange an overdraft facility with your bank in advance, but check whether you will be charged anything for this.

How can I make sure I have enough money on my account at any particular time?

The easiest way is to ask your bank to open a separate account and transfer the appropriate amount to it each month. Pay your bills from that account and check your statement each month to make sure you are still on track. Alternatively, make sure you leave enough money on your account each month to meet your budgeted outgoings.

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