Personal Finance For Dummies (How To Set Up A Simple Budget)

by Zara Mohammed, Money Columnist


Published in Money and Finance on 9th April, 2019


If you are looking for some insight and tips to help you manage your money better you are in the perfect place, because I have the ultimate beginner's guide on basic personal finance for you right here.

manage your money

Overview

Keep reading because in this article I am going to explore the following questions and topics:

  • How Does Your Past Experience With Money Affect Your Future Attitude Towards Your Finances?
  • Personal Finance Basics: 3 Golden Rules.
  • How To Set Up A Budget
  • Pay Off Loans & Credit Cards
  • Set A Savings Goal
  • Saving & Budgeting Hacks

How Does Your Past Experience With Money Affect Your Future Attitude Towards Your Finances?

I don't know about you, but personal money management wasn't something I was taught at school.

I was lucky enough to get some experience managing my finances as a child because I was encouraged to save up pocket money to purchase the things that I wanted.

My mother wasn't the sort of parent who bought me things I wanted unless I needed them for school. I also learnt how to budget for special occasions like birthdays, Mother's Day and Christmas when I knew that I had to buy gifts for my family.

Sometimes your early experiences with money can have an effect on how you view and behave with your money in the future.

My family were not very well off when I was growing up, but that just taught me how to be rich with what I had by making the most of it and managing my money well, so that I never felt like I was being deprived. I often think that it is better to have less money as it makes me more conscious of what I have and what I'm doing with it, which can in turn make me feel more in control of my life.

Take a moment to have a think about your early experiences with money, and perhaps consider how these might have affected how you view and manage your money now. Building an awareness of the pros and cons of your attitude towards money can help you improve the relationship you have with your personal finances.

Personal Finance Basics: 3 Golden Rules

Spend Less Money Than You Earn

This might sound obvious but so many people ignore this simple golden rule of personal finance.

If your outgoings are consistently more than what you have coming in each week, month and year, then you are inevitably going to end up in a downward spiral of debt and you will never be in control of your personal finance.

spend less money

On the other hand, just because you have the money it doesn't mean you have to spend it and break even each month. If you find that your income and outgoings are pretty much equal how can you expect to be prepared for emergencies or major life changes?

When you consistently spend less than you earn you will be better able to prepare for the future, and you will be in more control of your life in the long term, which becomes more and more important as you get older and your responsibilities and need for stability increases. It will give you more choices and more freedom.

Plan For The Future

When you make your financial decisions by looking into the future and planning ahead you will truly be able to relax and live your life knowing that you have everything under control, and there are less likely to be any unplanned financial bumps in the road.

I'm not just talking about your retirement, but also things like purchasing on plans that allow you to have the item without paying anything for 6 months.

Before signing any contracts you need to think ahead and realistically know for sure whether you are going to be able to keep up with the payments when they are due, and not just think you'll figure that out nearer the time.

Remember, very few things in life are for free these days, and you need to know whether you can truly afford the things you purchase, whether you are paying for them now or later.

Planning for the future also means ensuring that you always have access to emergency funds because you never know when you might need the extra money to pay for an unexpected bill, or if you will need to put money upfront for an important change or opportunity in your life.

Invest Your Money To Make More Money

The most sensible thing you can do when you are trying to make the most of your money is to think of ways to make more money with what you already have, so that your financial situation is constantly improving as time goes by.

Nobody wants to live life on a month-to-month basis with no sense of achievement or growth. If you put some of your money aside you will soon have something to show for your hard work.

invest money

The easiest option is to open up a savings account and earn interest on your savings. But there are other ways that you can make passive income by investing your money into business ideas that enable you to make money while you sleep.

Alternatively you might want to think about investing you money into yourself by enrolling on a course to improve your skills and knowledge so that can climb the ladder of success and have the opportunity of making more money in the future than you are right now.

How To Set Up A Budget

Don't be intimidated by the idea of drawing up a budget. You should be more intimidated by the fact that you don't have a clear overview of your financial status.

A basic budget can be as simple as getting out a pen and paper and writing down all of your income and your outgoings so that you can compare them and start making plans to improve your financial situation for the present, but also for the future.

It can be really enlightening to actually see where your money is disappearing to each month, and a budget will help to reveal this. We spend so much money on things that we don't necessarily need. Sometimes we are even paying for things we don't use but we don't realise it!

Get it all down on paper, or onto your computer and have a good look at the big picture of your personal finances. The best way to do this is to create 3 lists and write down the figures for a whole month, going back several months, so that you can get a realistic overview of what your finances looks like.

List #1 - INCOME

How much money do you make in a month? If you have several streams of income add all of these into your first list. You may want to include income from employment, income from self-employment, money made from selling personal items on Ebay, passive income etc. It all counts and you will need this information later when you come to assessing and altering your finances for improvement.

List #2 - MONTHLY EXPENSES (Fixed)

Next write down all of your regular expenses. This is money that regularly comes out of your income on a recurring monthly basis. It is payments that are fixed and non-negotiable, for example your rent or mortgage, and any utilities or council tax.

List #3 - OTHER MONTHLY OUTGOINGS

Now write down all of the varying outgoings you have. These are things that perhaps you have some control over like how much you spend on food or subscriptions that you might be able to cancel.

Write it all down so that you can have a clear idea of what you are currently spending. Don't forget to include all the seemingly insignificant things, like money spent on buses, trips in and out of the newsagents, subscriptions, cash taken out of the wall etc.

A good way to get a more coherent picture of all of this is to organise all of your outgoings into categories, like work-related expenses, hobbies, and your social life.

Finally you will want to calculate your total average outgoings per month for the past 6 to 12 months to see if it is more or less than your total monthly income.

And this will lead to the big creative task of seeing where there might be opportunities reduce your outgoings as much as possible, or increase any income until your outgoings are less than your income, and you have money to set aside each month.

Once you have minimised your outgoings and maximised your income, you can decide what to do with any anything left over.

Pay Off Loans & Credit Cards

If you have any debts you should set up a plan as part of your budget to pay them off in a set amount of time.

By doing this you won't have to worry or think about the money you owe because you will know that your debt is being dealt with, and you will have a clear date when you know you will be debt free.

pay your credit cards

This is a great goal to have, and one that you won't even have to work at as long as you are sensible about your repayments and set them all up as direct debits.

Set A Savings Goal

In order to prepare for your future and get more out of your income, you can set yourself a savings goal as part of your budget, and a plan as to how you are going to achieve your goals.

Some people like to have a single savings "pot" so to speak that they can dip into when they need to. I find that it can be less stressful and more freeing to set smaller savings goals to cater for different areas of your life. This way you can enjoy your income and spend your savings without any guilt, because it is all part of your budget.

Here are a few good ideas for savings goals:

  • Save for a holiday
  • Save for something expensive that you really want or need
  • Set aside a set amount for guilt free shopping
  • Put money away for emergencies

Savings & Budgeting Hacks

It is easy to fritter away your hard earned money on small things that add up without your realising it. So here are some hacks to help you to budget better and save more of your money for the things that matter.

Stop buying coffees on the go. They are really, really expensive! If you must have a hot beverage on your way to work just make your own at home and take it with you in a reusable travel cup. You will save so much money, and you will also be helping the environment. If you buy a flask you can even keep your coffee warmer for longer meaning you can sip and stop, rather than having to drink it all before it cools down.

save money

Stop eating out. Preparing your food at home is satisfying, less expensive and usually much healthier. It also makes the occasions you do eat out more of a reward.

Be more conscious about the power you use. Start switching lights off when you are not using them, or switch to energy saving bulbs and you will save a lot of money on your utilities bill. Try to turn things off if you leave the room or house, you don't need to have everything on standby.

Buy in bulk. If you use certain things regularly, consider buying them in bulk and you will save money in the long run. You can buy all sorts of things in bulk, from food to toiletries and stationery.

Good luck in creating an awesome budget and taking back financial control of your life! Now you can aim for bigger things and live your life the way you have always wanted to.

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