We all spend money on a big variety of things. Some of those things are necessary such as basic food and travel to work. However, there are many things that we buy which are not necessary such as holidays and alcohol. It is important to make sure that we are prioritising our spending so that we do not spend too much money on luxuries so that we accidently run out of money and have to get a loan. Although loans can be useful, they need to be carefully planned. It can be better to make sure that you are planning your luxuries properly so that you make sure that you are only spending what you can afford. In order to do this you need to know what you can afford and budget accordingly.
How to calculate what you can afford
- Earnings – firstly you need to know how much you earn. You need to think about what money you have coming in, both form your salary or wages as well as money coming in from interest, pensions, benefits and other things. Add all of these things together and you will have a good idea of exactly how much money you will have each month. It may be that there are differences month to month though. It could be because some income is not regular, perhaps sometimes you do overtime or something like that. In this situation you could calculate an average income but it is probably best to calculate the minimum. This is because you want to make sure that you do not overspend and if you do have a low income month but spend the same amount then you will overspend. It is therefore probably best to assume the worst and calculate it based on the lowest possible income that you can expect to get.
- Necessities – next you will need to think about what it is necessary for you to buy. You will have things that you always have to pay for such as your rent or mortgage, taxes, utilities, contracts, insurance, travel to work, loan repayments, food and things like this. There will be quite a lot of things that if we do not pay then we will be trouble. List all of these items and add up the amount. Make sure that you do not only list those that you can remember but actually look at past bank statements and list all of the things from them. Make sure that you also include things that you do not pay monthly but quarterly or yearly. Decide whether you want to save some money each month towards them or just pay them when they come along. If you do this, then you will need to make sure that for that particular month you do not overspend.
- Emergencies – it can be wise to make sure that you always have enough money left over to cover emergencies. You might have an unexpected bill or something like that and you want to make sure that there is some money available to pay it. If you have some savings in an instant access account then this might be enough so that you will be able to cover any emergencies but if you do not, then you may want to make sure that you do not spend all of your money and leave some by just in case. It could be a good idea to put this in a separate account so that you cannot accidently spend it.
How to budget
Once you have calculated how much money you will have coming and how much you need to spend as well as how much you want to keep for emergencies, you will be able to calculate what you have left for other things. Hopefully there will be some left. If there is not then you will need to find some ways to earn more or to spend less so that you do not overspend. The amount that you have left is what you have to spend on luxuries. You will need to be careful though with this money. You need to think about what sorts of things you want to use it for. It might be that you already spend some money regularly for luxury items, perhaps for subscriptions or things like that and so you will need to make sure that you have enough to cover those and then what is left you can spend on more ad hoc purchases. You will need to make sure that you decide whether to allocate some money each week or spend it all in one go. If you want to buy things that are more expensive and do not have the money for them then you will need to save up. Keeping a note of how much money you have and what you have spent can be really useful as you will then know whether you can afford all of the things that you want to buy.