Learning how to budget is tough. Running out of money or realising that you’ve got no savings when you need them most, is tougher. This is my simple, no-nonsense guide to budgeting regardless of your income source, stream or amount. I’m self-employed so will be explaining specifically how to map out your income and budget as a freelancer, but the same methods apply if you receive a set salary each month too!
Anyone who’s ever experienced having ‘no money’ will understand what a horrific feeling it is. When I first moved to London, aged 18, I had no savings and no job for the first month. I had to borrow £1000 to even leave the house. Growing up, I watched my mum struggle with money and debt and it spurred me to be really in control of my own finances. Honestly, I believe that whether you’re on minimum wage, earning the mega bucks or a lowly student, as long as you’re in control you’ll be okay. I’ve never had any handouts and I’ve been entirely self-sufficient since the day I left home and moved to London aged 18. Yes, now I earn a decent living that allows me to live comfortably and save well, but the below worked for me from when I was working in retail on £7 an hour, to when I was a full-time student, right up to today. That’s simply to say that if I can do it, literally anyone can.
When I recently wrote about the things I’ve learned during my first year freelance, an overwhelming number of questions centered around how to avoid living from invoice to invoice. I’ve previously shared my frustration at the damaging ‘Treat Yourself’ mentality our generation tends to live by and believe that most people can build savings whilst having a great time too. This is not about living on beans or moving back home whilst you scrimp and save every last penny, but about feeling in control of your financial situation, whatever it may be. I think it should probably be on the school curriculum (ideally in place of the ‘dream wedding’ project we spent 3 weeks on in Religious Education or those miserable laps of the field in the darkest depths of icy winter.)
You’ll need to know your monthly income, or have your accounts to hand if you’re freelance, and open up a spreadsheet. I’d recommend having two bank accounts: one that your money is paid into and your bills paid out of, and another purely for disposable income spending. For the latter, I use Monzo (who I’m in no way affiliated with, but there is a referral code at the bottom that will get us both £5) and it’s really made me conscious of how I choose to spend my money. Money Saving Expert is really good for finding the best current account for you as well as any additional savings accounts you might wish to open. Erm, and if your maths is anything like mine then grab a calculator…
I’ve used examples below to try and make it easier. This is not a reflection of my own accounts, income or spending! I’ve calculated based on an average £30K P/A salary as this is pretty standard in London, but the same formulas work whether you earn more or less.
WORK OUT YOUR MONTHLY INCOME
If you’re employed and earn a regular monthly salary, you can skip this step.
If you’re self-employed or have multiple income streams then you need to work out your average monthly income. All freelancers know that some months are definitely better than others, so what I do is calculate the average of the last 6-12 months of accounts. That’s as easy as adding it all up and dividing by the number of months you have.
So, if over the last 12 months you’ve earned exactly £30K gross, your monthly income is £2,500. After tax it’s around £1,982 take home.
Do not forget about tax! I immediately take 25% off (tax, NI plus any higher rate repayments) but 20% will probably do, and put it into a separate account ready for when I have to pay my return. Obviously this doesn’t take into account your expenses or personal allowance, but it does mean you should definitely have enough set aside when the tax man comes a knocking, plus potentially a bit extra to pay your account with and maybe even find you’ve got some bonus savings! Think of the joy of rebating yourself, rather than the horror at being faced with a bigger bill than you were expecting.
LIST YOUR BILLS, DIRECT DEBITS AND OBLIGATION SPENDING
This will be unique for each person but will likely include rent/mortgage repayments, energy bills, water bills, internet, council tax and home insurance. Plus any direct debits you might have like your phone, gym membership, car insurance etc. I also add to this list guaranteed business spending such as my monthly rate to my photographer, my web host fees etc.
If you pay anything annually (like the water bill or car insurance) then just divide it by 12!
It’s up to you if you want to include travel in this: if it’s a set amount each month such as a railcard or season ticket then do, if it varies then I’d leave it for the next step.
(based on London averages, dividing rent with housemates/a partner. I’ve also added some random misc payments to make it more realistic than literally just rent and phone!)
- Rent & bills: £800 pcm
- Mobile: £30
- Gym membership: £50
- Gadget insurance: £12.99
- Contact lenses: £20
Total: £912.99 – I’ll round it up to £950 for ease!
FIGURE OUT WHAT YOU NEED EACH MONTH FOR FOOD AND TRAVEL
So, that’s £1,032 left each month after your obligated spending. Next, take off what you need for food (groceries, not eating out) and travel. Have a look at previous months spending on your bank statements if you’re not sure and average it out across a few months.
The travel figure will vary by where you live, but lets call it £223.30 per month (the cost of a Zone 1-5 travel card). What you spend on groceries will depend on your lifestyle, habits and whether it’s just you or a family. For this example, let’s say £200 pcm (£50 a week in the supermarket).
That’s £423.30 total.
THE REST IS YOUR DISPOSABLE INCOME AND SPENDING – HOW ARE YOU GOING TO SPLIT IT?
So, our Example gal has £608.70 left to spend and save. All the bills and any other obligations are covered, as are groceries and travel.
Whatever that figure looks like once you’ve done your own math and how you subsequently choose to divide it between spending and saving is up to you.
SAVE A PORTION
Be realistic with savings. There’s no point putting so much away that you’re struggling to live and end up dipping in to it, but obviously the more you can prioritise your spending the bigger your rainy day/dream house/world travels fund will grow.
Let’s say she saves £200 a month into a 5% regular saver. In a year when it matures the balance will be £2, 464.52! You may be able to save more than this, or may not be able to save this much. As long as you’re putting something away and putting it somewhere where it’s working for you at that, then you’re in control of your money.
Obviously if you have credit card debts you need to weigh up repayments versus savings. If they’re on 0% you might be better to save and earn the interest before paying off.
PAY YOURSELF THE REST EACH MONTH INTO YOUR SPENDING ACCOUNT
The reason I love Monzo is because I can set a monthly spending target and I can easily see how on track I am throughout the month and exactly where I’m spending my money too. It’s made me so much more conscious; for example realising I was spending as much (if not more!) on eating out than on groceries really made me adjust my habits.
I think it really helps to put your disposable income in a different account. It makes it much easier to track and these kind of banks usually have great apps too designed to help you. Especially as I’m self-employed, I see it as paying myself a disposable income salary.
So, Example gal would pay herself £832 every month. I include the travel and groceries budget within this because I can then check that I’m sticking to it and see exactly what I’m spending in which supermarkets, and on which modes of transport. It makes me think twice when I’m feeling lazy and want to grab an Uber!
STICK WITH IT!
That £832 covers food and travel and leaves over £400 a month purely for ‘unnecessary’ spending. Eating out, coffees, cabs, shopping…However you choose to spend it, it’s there and I guarantee it will make you think harder before whipping the plastic out.
If you’re invested in being in control of your money then do your best to stick with it. If you don’t have the budget left this month, consider saving the purchase for next month. If things are looking a bit tight, say no to dinner out and grab a pizza and a bottle of wine for a tenner from the shop with your pal. This is not about limiting your lifestyle or spoiling your fun but rather making sure you’re living within your means, rather than splurging and regretting it later.
Try not to stick anything on you credit card unless you absolutely have to, in which case pay it back each month out of your disposable income. At the end of the month, if I’ve actually spent less than my target I just transfer the remainder into my savings as a nice bonus!