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How To Budget

Spend less than you earn. Easy to say, but harder to achieve when we're trying to keeping up with the high-livin' debt-ridden Jones's. It's time to focus on the challenge of coming up with and living within a budget.

'Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery'.

When Charles Dickens wrote David Copperfield back in the mid-19th century, few people would have disagreed with Mr Micawber's model of economic prudence. At the heart of it, of course, is the idea that we should strive to live within our means.

That is precisely what a budget is designed to help us achieve. If you looked the word up in a dictionary, you would find definitions along the following lines:

An estimate of income and a plan for expenditure
Total amount of money allocated for a specific purpose during a specified period
A restriction on expenditure

So a budget is a financial planning tool, underpinned by the notion that there is likely to be some form of restriction on our capacity to spend. If we possessed limitless wealth, we wouldn't need to restrict our spending.

Unfortunately, these days, many of us suffer from a credit card mentality that seems to have banished the idea of living within our means to the realms of Dickensian quaintness. It's as though perched on our shoulder is a monstrous parrot of overspending that squawks in our ear: 'Debt's the way to do it.'

Our capacity to use credit cards to gloss over shortfalls in the cash we have to hand has really undermined the concept of budgeting. In the pre-credit card days, if we had £100 to see us through the week, we would have had to adjust our spending accordingly.

If we really want to put together a budget that's going to work, then we need to take a clear-eyed view of our credit card usage. When we pay for something with a card, it's just a different way of spending our money. So if we have a budget of £100, and spend £90 in cash but have also put £20 on our credit card, we have gone over budget.

Do you have any idea how much you've spent over the past month? Keep a comprehensive daily diary of expenditure for one month and use that diary as a basis for your expenditure budget.

The key here is to be realistic. You're unlikely to stick to a budget which allows you to drink one bottle of lager a month if your social life involves you being out three or four nights a week. Equally, your budget may fall apart if you drink seven or eight bottles every time you go out. You need to balance self-discipline with realism.

Coming up with your income details ought to be relatively straightforward. A quick compare and contrast between what you have coming in and what you have going out will highlight where you may have budgetary hotspots, i.e. points in the year when the numbers look a bit grim. The challenge now is to develop a plan for preventing those hotspots getting the better of you, maybe by adjusting down your spending plans, or perhaps by selling off your old stamp collection. The key here is that you have some time to sort out a sensible solution.


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