HOW TO...(Part II) BUDGET WITHOUT LOSING THE WILL TO GO ON

CURRENTLY UNDER REVISION

HOW DO I ORGANISE MY OUTGOINGS?

The ideal budget?

Note: All views are the author's own.  The Blogger has no formal experience of debt counselling (except on the receiving end) but did work in finance for a time.  Details are at the end of the post.    

BACKGROUND

In Part I of How to...Budget Successfully, we saw how spending carefully leaves you with more money for bills, expenses and savings.        

In Part II, we look at How to Manage Outgoings and What to do if outgoings outstrip incomings.

TOPICS INCLUDE:  (in this order)

• Family Budgets: how to divide up your money

• 'Delayed Gratification' or Not 'having it all, Now!'

• Change of attitude for Successful Budgeting

• Philosophical musings on Money, Happiness and the value of hard work, planning, discipline & determination 

• The key to successful Budgets

1. be realistic: draw up a budget you can stick to
2. divide payments into priority and personal
3. bills and expenses come first

• Three tools for reaching budget goals

1. Banks,  including current accounts, debit cards, budget accounts and savings accounts
2. the 'Envelope' system
3. a combination of banks and envelopes

• Balanced Budgets Don't Mean Inflexible Budgets 

• I'm spending less where I can but my outgoings are still higher than my incomings 

1. Increasing Earnings
2. Professional Advice

• BE CAREFUL  

FAMILY BUDGETS: HOW TO DIVIDE UP INCOME 

50 years ago, bank managers would recommend something like the pie chart above to make the most of earnings. The idea was to install good personal finance habits.  To get used to paying for a roof over your head, feed and clothe yourself, get to work and back, have a bit of fun, establish a credit rating and build a reserve for the future.  

Today savings are a hope not an expectation. After rent and debt, the segments in the pie chart are determined by how much is left in the pot, not what a person needs or wants. 

DELAYED GRATIFICATION

Part of the problem is that - and 67 is going to go all Grumpy Old Woman here - too many people want to 'have it all, now'! The idea of waiting for something you want is no longer fashionable. In fact what's known as 'delayed gratification' is probably an unknown concept for many.  That's one of the biggest reasons why so many people get into trouble with money.  

A change of attitude may be necessary if budgeting is to be successful.

Courtesy of cartoon stock.com
 and licensed  for reuse under
 this Creative Commons Licence

Some people believe 'if banks lend me money and I can't repay, it's their problem'.  Don't be foolish; it will also be your problem.  Big time. Stop paying bills and your credit rating (how banks rank ability to pay) will be ruined; overdrafts and/or loans, and maybe even a bank account, will be impossible to come by. The 'All will be well' attitude - whether self-deceptive or airy-fairy - just won't cut it. 

Live life according to what your income is now.  Don't spend money you don't have.

If your National Savings Certificate wins you a million quid or an expected bequest comes through, change your lifestyle then. Personal finance and budgets are for reality not dreams. 

Money doesn't bring happiness; hard work, planning, determination and discipline does

It's easy to feel angry, resentful and jealous of bankers and/or friends whose families can provide financial help.   

Don't.  

'Our incomes are like our shoes; if too small, they gall and pinch us; but if too large, they cause us to stumble and to trip - John Locke'

Pic Courtesy of ratebusters.com and licensed  for reuse under this Creative Commons Licence

It doesn't matter which country you live in or what political system you live under, there will ALWAYS be people who have more money than others.  (Except maybe in primitive tribes with under 25 members.)  Whether the rich deserve their money is a philosophical issue (though we are all entitled to moan).  It's not an excuse for anyone to neglect their own finances.      

We don't live in a Uptopia where 'everyone is equal in all things'.  We have to start from where we are.  That may sound unsympathetic but thankfully, it doesn't mean we are stuck forever in cash-strapped circumstances.  It's possible to improve personal finances with hard work and good ideas.  Luck and help from outside agencies also plays a role. 

Hard work, planning, determination and discipline will take you far.  Allow your dreams to spur you on to improved finances. Recognise that opportunities can  present themselves anytime, anywhere.    

Forget the idea that money brings happiness.

No one has any idea what other people's lives are like.  Many apparently well-off people live lives of utter misery.  People who earn millions can waste millions on stupid investments or bad business decisions or human frailty; they end up worse off than families on limited incomes.  Those who manage to hang on to their millions often spend their lives looking for meaning, wondering if they're loved for who they are or for their money. 

Pursued by snake-oil investment managers, fraudsters and conmen, people who have money are not immune from life's problems.  Including being the target of a one-sided class war.

Scientists have determined that five key qualities are necessary for health, wealth and success: emotional stability, determination, control, optimism and conscientiousness. People from privileged backgrounds who lack character strengths have less chance of succeeding than people from less fortunate backgrounds who are reliable and self-disciplined.   

No one is guaranteed a happy life.

Try not to be resentful that benefits systems don't help more. They are set up to prevent poverty not to provide a comfortable lifestyle.  
      
Be grown-up.  A Balanced Budget (outgoings matching incomings) will make life easier.  


THE KEY TO SUCCESSFUL BUDGETS? 

A.  DRAW UP ONE YOU CAN STICK TO

1. Be realistic about what a Budget can achieve 

• The most important thing is what you can spend each month or year, not what you want to spend    
• Some personal expenses may have to be reduced or even eliminated for a time to make the Budget work

2.  Living like a pauper on a very restrictive budget is to be avoided; sooner or later, you'll give up.  
   
3.  Determination and Discipline are the keys to success with Budgets (and other areas of life).   


4.  Even a well planned Budget may need a few trial runs before it's right. Is it easy or difficult to keep to the Budget? It's a good idea to have in mind other courses of action for some payments and expenses. 

*****

Sample monthly budget for a single person on income of £15,000 a year with a small mortgage.
                                                                     £

Incomings:

                                                           

   Pension                                                      

Outgoings: 

Priority

    Bank loan                                         
    Inland Revenue back tax                   

    Council Tax                                          

    Mortgage                                          65

    Electricity                                        108 

    Food                                               180 

    Entertainment                                   40

    

Non-Priority (Personal Choice)

    TV Licence                                       14

    Broadband                                       20 

    Newspapers                                     20     

    Telephone  (paid off)                                 

     Computer (bought outright)                                       

     Broadband                                     25

     Clothes                                          20 

     Personal Grooming                         15 

     Medical (glasses etc)                       25 

     Miscellaneous: dry cleaning etc        10 

     Emergencies                                   12 

(Note: no transport costs due to Freedom Pass)

                                TOTAL OUTGOINGS             


Therefore total incomings  

                 total outgoings  

RESULT!!!

****

  B.  DIVIDE PAYMENTS INTO PRIORITY AND PERSONAL

Priority:

• Where non-payment can lead to eviction, bailiffs or court orders. Examples: rent/mortgage, debt emergencies 

• Essentials for keeping the body strong enough to earn money: food, heating, equipment, transport 

• Bills.  If debts are not repaid, they just get bigger and bigger; getting yourself debt-free becomes even harder.  Examples: loans, bills, taxes. 

• Entertainment/relaxation but only at levels appropriate to income and outgoings. Can but does not necessarily include eating out, tv, internet, treats.

Personal (non-Priority) Expenses 

Some of these may have to be reduced or even eliminated for a time to make budgeting easier later

• TV licence
• Broadband 
• Phone contract
• Clothes & Shoes 
• Make-up
• Gym membership
• Newspapers 
• Laundry & Cleaning Expenses 
• Dry-cleaning 
• Insurance 
• Repairs/Maintenance
• Luxuries, including home furnishings, presents

C.  PAY BILLS & EXPENSES IN ORDER OF PRIORITY 

Mortgages/rent, loans and bills always come before Personal (non-priority) expenses.  

D.  THREE POSSIBLE WAYS TO HELP REACH BUDGET GOALS 

1. Banks- best for those with a regular job where employers computerise payments
2. The 'envelope' system - best for those paid in cash or who are nervous about banks BUT NOT FOR THOSE WITH OR CLOSE TO SOMEONE ADDICTED TO ALCOHOL, DRUGS OR GAMBLING OR LIVING IN CLOSE PROXIMITY TO STRANGERS
3. A combination of the two.

E.   USE EVERY TOOL AVAILABLE  

BANKS 

Managing a Budget with a Bank requires Tools: 

1. a current account
2. a debit card
3. a Budget Account
4. a Savings Account (opt)

(These services are currently free in the UK but are there are rumblings that banks may soon start charging for holding your money.  The International Monetary Fund recently recommended they do so.)

1.  A Current Account
     
Income from your employer goes into this account automatically by computer.  From this account, you can pay bills and withdraw money.  If there isn't enough money in your account, it won't pay your bills or allow you to withdraw money.  

2. Direct Debits and Standing Orders

You give the bank permission to take money out of your current account every month and pay the bills and expenses you have selected. It's done by computer; once the direct debit or standing order is set up, no further action is required unless (1) the amount of payment changes OR (2) there isn't enough money in your account to cover the outgoings.

These are very useful for Priority expenses and monthly Personal Expenses, such as:

Priority

• rent/ mortgage
• loan repayments
• council tax

Personal Choices 

• transport
• tv license 
• broadband & other media
• phone contract
• subscription tv
• Council tax 
• gym membership 

2.  Debit Card

A Debit Card usually goes with your Current Account.  It allows you to use cash machines to withdraw money at any time for expenses or immediate purchases. It won't give you money you don't have. 

Rules for Debit Cards:

• NEVER, EVER, EVER give out your pin number to someone else.  If a caller says s/he is a bank employee, take their name, call your bank and CHECK!!
• Always conceal your number when inputting it into an ATM or card reader
• Cash point thieves are increasingly sophisticated when it comes to reading your card/pin number; banks advise that money is withdrawn only from cash tills inside supermarkets and shops - not the ones outside banks.

3.  Budget Account

A Budget Account is a special savings account for future bills and expenses.  The money comes from your Current account. The money allowed by your budget for clothes, for example, needs a place to accumulate before you have enough to buy something. 

The money goes in monthly or weekly.  Unexpected imcome funds can also go in.  

The money can be taken out at any time.  But - here's where Discipline and Determination come in - you need to forget about it unless/until the bill or expense comes due.  Otherwise the money can be frittered away on unplanned expenses and won't be there when you need it, for bills or to buy what you've been saving up for.    

A Budget Account helps you make sure that there is money available for bills when they fall due or personal purchases when they are needed.  They include:
  
Priority  

• electricity
• gas 
• income tax

Personal choices

• clothes 
• shoes
• grooming products 
• haircuts
• medical, ie glasses, prescriptions
• dry cleaning
• insurance
• furniture
• repairs 
• Emergencies  

Your Debit Card also works on your Budget Account.  With it, you can:

• pay bills 
• transfer funds to your Current Account 

(Some banks do not pay interest on Budget Accounts and those that do pay a very small rate.  But Budget Accounts are extremely useful for managing a Balanced Budget.)

4.  Savings Account

This is an account that pays a higher rate of interest in return for you having to give period of notice before you take the money out.  The notice period could be 30 days to three months. Savings accounts are for major expenses such as a deposit for a mortgage, your wedding or major travelling.

The 'Envelope System' of Budgeting 

   
THE 'ENVELOPE METHOD'

...is very simple:

• You create an envelope for each category of expenses
• You fill each envelope with the money you've allotted to that particular category (either monthly or weekly) 
• You keep track of how much money goes into the envelope and when
• The money is used to pay bills or buy things  

• For categories like quarterly bills, the envelope money piles up until the bill arrives and is then paid 

• With categories like food spending and entertainment, the envelope money is spent until it's gone (there's no more until you add the next allotted sum)

• With personal expense like clothes and grooming, the money stays in the envelope until there's enough to pay for what you want 

• When the funds are used up, you start back at zero 

Some people think this system is unbearably twee but it is effective - and entertaining - for close families.  It's helpful for managing money and also teaches everyone how money works. And there are unexpected little windfalls.

The disadvantage is clear.  If the money is lost or stolen, it'll be forever.  It won't come back.    

THE ENVELOPE METHOD IS NOT RECOMMENDED FOR ANYONE WITH A RELATIVE, FRIEND OR COMMUNITY WITH - OR IS DEVELOPING - AN ADDICTION TO ALCOHOL, DRUGS OR GAMBLING.

COMBINING THE TWO SYSTEMS

To reduce risks the 'Envelope' System can run alongside a bank account. Use the bank for major outgoings like mortgage/rent, loan repayments and tax bills.  The Envelope system is good for food bills, entertainment, future bills and personal expenses like clothes and grooming.
     
Equipment needed:

• A good strong cashbox with key and envelopes (try WH Smith or Rymans or regional equivalents)
• Vertical Envelopes with the flap at the top; the specially printed ones shown above aren't necessary

Discretion is advised. 

•  Keep what you're doing in the immediate family; you can say you're trying out a new budget but don't talk about the method  
•  Train your kids not to discuss your budgeting method with others, even friends.  
• The cashbox is safer out of sight, in a good hiding place.  

The Envelope Method Occasional Treats

1. Let's say you've set aside £20/week (£80/month) for entertainment.  You've managed to provide lovely treats for only £10 a week for three weeks.  At the end of three weeks, instead of £20 for the final week, you have £60! (Week 4: £20 + Week 3 £10 + Week 2 £10 + Week 1 £10).  You can spend the full £60 for a trip to a Museum exhibition that requires tickets.  Or you can spend £35 at a pizza parlour and sock away an extra £25 into the holiday envelope.      
2. At the end of three months,

   

   Ice cream cone from Artigiano 

   the electricity bill has been paid and so has the dry cleaning.  There's a bit of money left over in these two envelopes - £15.  How to spend it?  It's a luxury so let the kids decide: stopping off at the Artigiano ice-cream parlour in Camden market for their exquisite ice cream? A video of their choice with a few friends and home-made popcorn?    

 BALANCED BUDGETS DON'T MEAN INFLEXIBLE BUDGETS: 

More examples:

• a widow in her late 60's fell on hard times after a comfortable life; now and again she blows her clothes budget on a £100 haircut or her entire grooming budget on expensive skin cream
• a widower with property but little else spends a third of his weekly food budget on one good bottle of wine and gourmet ingredients, eating and drinking sparingly the rest of the time (this system also improves his health)  

On a smaller scale:

• if there haven't been any miscellaneous costs at the 3 month mark, spend it on a luxury of your choice

I'M SPENDING LESS WHERE I CAN BUT OUTGOINGS ARE STILL HIGHER THAN INCOMINGS.

1. Is it possible to bring in more income?  
2. Seek professional help for your debts

INCREASING EARNINGS

If you already have a full-time job it's difficult to take on more work. But one night or day on weekends might be doable.  Try it for three months and then decide if it is worth continuing or if your health will suffer.  

• pub or restaurant on the weekend (Friday night or Sunday lunch?)
• stacking supermarket shelves overnight 
• handyman
• gardener

If you're a partner stuck at home, consider setting up a small business which you can work at in your own time.  It may be hard but even small contributions can ease the pressure on a sole earner. 

Hobbies can be turned into money-spinners.

• sewing: either repairs or proper dressmaking
• typing: for local firms which don't have enough work for a full-time person or for post grads working on academic papers (although post-grads can sometimes be a pain in the butt!)
• crafts: embroidery, crochet or knitting skills can bring in good earnings; if you're very creative, earnings can be excellent
• farmers' markets: sell home-made baked goods or preserves or candy (it's best to do this in pairs); there will be a fee for a stall
• cooking: is your local pub interested in making an order for regular fresh home-made casseroles or baked goods (you might have to do one or two for free before they can decide)
• massage: only take on people you know or who are recommended to you
• bookkeeping
• sports stadiums: get permission to set up a stall selling good quality burgers before the match outside the stadium, and baked goods after
• Also see: The Daily Mail's Save a Thousand Pounds a Month

It's advisable to research regulations and qualifications; decide what is practical and sensible. Can you find the funding to do a course? Is there a source for good second-hand equipment? Go for it! 

HOW DO I DISTRIBUTE WHAT I HAVE:  GETTING PROFESSIONAL HELP

Sadly some people are so deeply in debt they need professional help.  

The UK government set up a Money Advice Service offering free debt advice but due to demand, it's been difficult to get an appointment. The Citizens Advice Bureau offers good debt advice but it has to compete for Lottery funding; their income has dropped and centres have closed.    

In some areas, such as Camden in London, local councillors have undertaken training at the Money Advice Service and offer debt advice.  

A trained debt advisor will usually:

• look at your income & outgoings & decide how much you can reasonably afford to pay in debt payments
• helps you write to the people to whom you owe money and recommend your payments be reduced for a time
• in some serious cases, a lot of what you owe is added up and made into one large debt; a single payment per month will be made.  This is usually a last ditch effort and is not recommended.

The debt advisor's job is to be practical but fair.  But note this made-up example: 

A woman decided to walk to work - a distance of some miles - to save on transport fares. She loses weight and feels better but has concluded that walking is a slog and feels entitled to componsate by using most of the money she saved on nights out and non-priority personal expenses. The debt advisor disagrees. Without his approval, there would be no debt relief programme and no recommended reduction in some debt payments. In the end, she reduces her entertainment spending and uses the rest to pay bills.    

If you can't get onto the Money Advice Service Waiting List or if there is a very long wait, ask for help from:

• your local councillor
• your local Citizens Advice Bureau
• your bank manager

Make it clear that you don't have enough money for all your bills and that you need help.  If they can't help, they should at least be able to point you in the right direction.  You'll need to prepare a list of your incomings and your outgoings plus copies of bills and a list of the difficulties you are having.

BE VERY CAREFUL SEEKING DEBT ADVICE; AVOID GET RICH QUICK SCHEMES

Be very careful with debt service advisors listed on the net.  The word 'National' does not mean government involvement.  Look for the phrase www.gov.uk at the beginning of the web address.

Avoid Get Rich Quick Schemes; if something seems too good to be true, it probably is.

Keep permanently in mind this goal:

 Courtesy of blog.mint.com and licensed  for reuse under this Creative Commons Licence

Useful contact: National Debtline - GOV. UK

Some Sources:
This is Money. winner 'financial website of the year', personal finance
Money Advice Service Wales
Effective Budget Planning from 'Which' 

Note: The Budgeting posts are not Editorials on Poverty and Fairness.  They were written with the hope of providing a useful guide for people who have never budgeted before.  67 acknowledges that there are plenty of troubling issues around contemporary family finances, including low wages and lack of affordable housing; these topics are best addressed in the political sphere.

B Lee/Bright Sun Enterprises accept no liability for the consequences of any actions taken on the basis of the information provided.


B Lee: past financial career
The Blogger worked in international banking and explored personal finance through journalism and financial public relations.  She was co-author to currency expert [now] Lord (Howard) Flight: 'All You Need to Know About Exchange Rates'. (pub. Sidgwick & Jackson Ltd 1988).

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