Many people can be put off budgeting because it means that they will have to go without everything that they enjoy. It is not surprising that they think this as it can conjure up images in the mind of sitting in a cold dark house with just a small tin of soup to eat each day. Thankfully, budgeting does not mean this at all.
What is budgeting?
Budgeting is where we allocate funds for certain purposes. It is as simple as that. So, when we get paid or get money coming in, we can make sure that there is enough to pay everything that we need by allocating funds for different things. What we decide to do will depend on what we need to pay for and the types of things that we want. It does not necessarily mean cutting out all luxuries but it will depend on what goals you set yourself.
People will budget for a variety of reasons. It might be that they are struggling to cover all of their costs and so need a way to make that easier. It might be that they want to free up some money to repay a bad credit loan or save up for something. There could be all sorts of reasons. It is worth keeping in mind the reason that you are budgeting though as this will allow you to keep motivated to make whatever changes that you feel are necessary.
How to make budgeting suit you
When you decide how to budget it is worth making a plan which suits you and your lifestyle. You will need to start by knowing how much money you always have coming in. Then you will need to work out what items you have to pay for. This will be loan repayments, rent, food, utilities, contracts and everything that you pay regularly. Then you will be able to calculate what you have left. It will be up to you to decide how you allocate this money. This is the money that you could choose to spend on luxuries or whatever you want. You will need to cut back in some areas but it is up to you to choose where you will do this. You can try to pay less for your essentials as well and this will leave more money to put towards your luxury items. If you compare prices on all things that you buy, you could find that you will be able to save some money by switching to different suppliers or retailers and hardly notice any difference or put in much effort but have more money available.
How to choose where to spend money
It can be tricky knowing how to allocate your money. Once you have decided on what is essential and put money aside for that you should have money left over. This is what you will need to use to spend on all of your luxury items. It is worth prioritising your spending so that it is easier to decide. For example, you might not want to give up your Saturday nights out but you might be prepared to take coffee to work rather than buying it on the way. In order to prioritise, you will need an idea of where your money is going. Therefore, if you look at your bank statement you will be able to note down all of the things you are spending money on. You may also need to look at your credit card statement. If you use a lot of cash then you will have to remember what you are spending and this could be more difficult. However, you could always take the time to write down what you are buying and how much you are spending as you do it and then you will have the information that you need. It is then up to you to decide how you will allocate your money. Think about whether you want to decide on how much you will spend on each area (such as going out, hobbies, DVDs etc) or whether you want a weekly budget to spend as you wish each week. It is good to think about what might work out the best. Also consider what you might do if you want something more expensive, such as a holiday that you cannot afford in a month. Will you save a bit up each month towards it? If you do this then where will the money be taken from, which part of your budget will it come from? Be flexible though and if the system you use does not work, then you can change it to suit you later. Your needs will change as well as your priorities so make sure that you leave room for that. Do not think you have failed if you change the system, it is important to be adaptable for it to work for you.
Life insurance is something which can be really oversold. Many people end up getting it when they do not really need it. However, there are times when life insurance can be really handy. It is a good idea to make sure that you know whether you need to have it or not.
Many people take out life insurance when they take out a mortgage at the request of the lender. This type of loan usually requires it. The life insurance is linked to the mortgage so if the person responsible for repaying the mortgage was to die, the mortgage will be automatically repaid by the insurance company. If you do not have this insurance not only will you in in breech of your mortgage conditions but you could leave a lot of debt for someone else to pay if you do die. Leaving debts or expenses to pay is something that many people are concerned about which is why many take up a life insurance policy.
There are life insurance policies that will pay out for funeral cover. You can take these plans out with a funeral director or through other means. These can help to put your mind at rest as you know that there will not be problems for someone else having to come up with this money. However, there are other ways that you might be able to provide the money for this. Perhaps just putting what you would be paying out for the monthly premium into a savings account each month will soon add up to enough money. It is good to think about what you will need to pay for this. Then you can think about how many payments you will need to make and whether you think that you are willing to risk not having the insurance and make those payments instead. Of course, it will also depend on whether you think that you will have the self-discipline to make the payments and also not spend the money that you have saved. You could put it into an account in the name of your next of kin so that they can easily get access to the money when needed and you will not be tempted to spend it. However, you will need to make sure that they will not be tempted to spend it themselves.
Some people like to take out life insurance because they want to make sure that their family are well looked after when they die. This could be one that pays out an income so that they can cover regular costs or a lump sum. Although it can be really nice to think that they will be taken care of like this, it is worth thinking about whether you are overpaying. Consider the risk to start with. Is there a genuine risk that you will die and that they will need the money or are you paying out each month for something that you will be very unlikely to use? Also think about whether you could pay this money into an investment instead that could provide an income if necessary but that will be there for you to use if you need it once your family grow up and are able to support themselves.
It can be difficult to assess the risk though. You may get peace of mind knowing that your family will be looked after. However, it is worth thinking about what you might be able to do with that money if you were not paying out for insurance that you may never use. You could be using it to have fun with your family now, to save up for their future or even to pay off loans, which would have to be paid off by your next of kin if you died. It is well worth having a discussion with your loved ones and decide whether it is worth spending the money this way. Although it may not be much to pay out, if you add up how much it is over a year and over a decade then you will be able to think about whether that money might be better spent elsewhere. If you have loans, then you could calculate whether it will be cheaper to use the money to pay them off and not leave outstanding debts or better to pay it into insurance which will pay out and the money could be used to pay the debt. It could be a complex calculation but worth looking into.
It is also worth making sure that you will be able to afford the insurance payments. If it is optional (i.e. not required by your mortgage lender), then only pay in if you can afford it. If you have to borrow money to afford the premiums then it is very likely that you will be paying out more than you would if you just put amounts into a savings account when you could afford it or paid off any other debts that you have.Continue Reading...