Budgeting is an important part of your life.
However, it is also important to understand how to budget efficiently.
With that in mind, we’ve put together a template to help you with your budgeting process.
If you’re new to the topic, it’s best to read through this guide before you start.
Budgeting and planning are very different things.
We’ve made it as easy as possible to understand what the two are and how they affect each other.
To make things a bit more clear, here are the key points: Budgeting A Budget is the total amount you will spend in the coming year.
It is the sum of all the expenses you will incur over the course of your financial life.
Budgetary categories and budgets are different from income, and include a range of expenses that could impact your monthly income.
You can choose between income, savings and retirement.
You should plan your finances around the amount of money you have in reserve (savings).
You can also use a range between the three categories: tax-free savings, tax-deductible savings, and tax-deferred savings.
You may also use any combination of income, taxes, savings, pensions and investments.
The idea is that the higher your income, the more you can save.
You also have a better chance of saving for your future, so a higher income means you can take more risks, which will boost your savings.
It’s important to be realistic about what you’re planning to do.
You’re only as good as the amount you spend on your finances.
Budgeters often use the words ‘excessive’ and ‘unsustainable’.
However, this doesn’t always mean spending too much.
Spending too much can result in a poor quality of life, a lower standard of living and even poor health.
The amount of a budget is not the same as what it costs.
If the cost of your monthly expenses is more than the cost you’re expecting to pay over the life of your plan, you might not be able to afford to maintain the level of expenditure you’ve set out.
If your spending level is below what you’ve estimated, then you might be able, at some point in the future, to find savings you can spend in a more sustainable manner.
Savings The amount you’re willing to put aside in the event of a financial emergency is called your ‘savings’ or ‘saved up’.
You should save a minimum amount each month to cover your living expenses, and for retirement.
The difference between the amounts you should save for each month is called the ‘savable’ amount.
You’ll often see a range.
For example, if you’re living in an area where you can expect to live for the rest of your lives, then it’s likely you’ll be able afford to put £10,000 towards your retirement.
If not, then your savings should be higher than that.
You might also need to spend some extra to cover any unexpected costs, such as emergency accommodation.
Tax-free Savings Tax-deducible savings are the same way.
They are different to income and savings, but are not taxed at all.
The basic principle is that you can withdraw a certain amount each fortnight from your savings account.
You don’t need to put money aside for tax purposes, so you can make tax-efficient purchases with your savings that could help you pay less tax over the longer term.
Tax credits You can use a variety of tax credits to help offset the cost.
These are sometimes called ‘tax credits’ or tax offsets.
There are also various tax-advantaged savings accounts, such a Roth or 401k.
You must apply for these in order to save enough for retirement, and to avoid losing any tax benefits.
However you can get help with these if you qualify for tax-saving assistance.
Retirement Savings If you plan to retire later in life, you may also need more than £1,000 saved for retirement (called ‘retirement savings’).
This can be achieved by either using a tax credit or a tax offset, depending on your circumstances.
Tax offset This is an income-based savings scheme.
You have to contribute a certain percentage of your income each month towards your ‘retirement income’.
This is known as your ‘deferred tax’.
Tax credit This is a tax-equivalent savings scheme, in which the income you’ve already earned is deducted from your ‘pre-retirement’ income.
For instance, if your annual income is £100,000, you’ll have to pay £1.25 each time you save the equivalent of £10 in a tax deferred account.
For most people, this will mean saving a higher amount each year.
The average retirement savings rate is around 3%.
The rate is the same for both tax-exempt and tax credits, and is based on your actual annual income.
Retirement savings can be done tax-effectively.
For more information, read our Tax-effectiveness article.
How to Budget and Budgeting With that said, budget