Martin Lewis' Money Diet: It's weigh-in time!
This week it’s our Money Diet week – with Money Saving Expert Martin Lewis guiding us through it. To start, it’s the weigh-in, where you analyse your finances to see if you’re underspending or overspending…
It's often said: "In debt? Do a budget!", "Skint? Draw up a budget!", "Wife run off with the milkman? BUDGET!" The problem is most budgets don't work. Yet they are genuinely important, done right a budget is the key weapon in your financial arsenal.
By budgeting effectively you should both cut your outgoings and ensure you don’t overspend, all with very little hassle. So to get the most financially out of 2015 here are my four steps to doing it.
Step 1: Analyse your finances.
Do you know how much you earn? Of course you do. Do you know how much you spend? This is the one that stumps most people. Yet unless you can answer both, it’s impossible to know if your finances are in order.
Overspending isthe single most dangerous threat to your finances, as it means you’re either eating your savings, or building up debt. If it keeps going you can end up in a debt spiral. Here you spend more than you earn so youborrow to fill the gap, meaning an ever increasing amount of your cash goes towards paying your debts, so you need to borrow more – ad nauseam.
To find out how much you over or underspend by, you can use Martin’s free budget analyser tool. Or use a tool from the Money Advice Service. Set some time aside to do this, and if possible, have a few months of bank and credit card statements with you.
It’s important to do these formally or you usually risk falling into one of two traps:
- You only look at a snapshot of a month’s expenditure.Yet… WE DON’T SPEND BY THE MONTH. Think about Christmas which, at an average of £600 a year, should be counted as £50 extra a month – or a summer holiday, or buying a new sofa. These should all be in your budget, but aren’t, giving false comfort.
- The categories are too broad.It isn’t just motoring, you need to be specific. So it’s petrol, breakdown, MOT, car insurance, new tyres and more.
Step 2: Pain-free savings
Once you know the score, even if you’re underspending, it’s worth attempting pain-free savings. This is where you cut costs on things that don’t change your lifestyle. So switching energy provider, getting cheaper car insurance, haggling down your Sky TV, getting a cheaper train season ticket or more.
Step 3: Redo your budget
Once you’ve done that, go back to your budget planner and change the figures to reflect the new costs. If you’re now spending less than you earn, great – we’ll be covering How to stick to your budget tomorrow. If not, it’s time for…
Step 4: Painful savings
No apologies, if you’re overspending you need to stop and these changes will involve cutting or curtailing things you do. Yet small things can make a big difference. Imagine each day at work you buy a hot drink at a coffee shop that’s £2 – there are 250 working days in a year so if you cut it out or take a flask, you’ll spend £450 less (assuming you take 25 days off on holiday).
Do you really need all your Sky TV channels? Can you make food rather than get takeaways? Why not start making sandwiches for lunch? Do you need the weekly celeb gossip magazine? Do you need a car – could you sell it? Can you get a second job? Stop smoking? Go through everything you spend money on and ask yourself: “Is that important? Could I cut back on it?”
You can’t say no to everything. Weigh up the most important things to you and understand that to protect those you need to sacrifice other things to get your expenditure to match your income.