Making budgets work when money is tight

By Marianne Curphey

You've likely heard the advice to budget your money wisely and track where each pound goes, and you'll be less likely to overspend or overdraft. But when all your money goes to bills and necessities, it may seem there is no need to budget -- you know where your money is going, the only problem is not having enough!

Indeed, despite claims from politicians that the economic recovery is gathering pace, many British families are struggling financially. In fact, according to 2013 research from thinkmoney, one in 11 Britons had only £10 of disposable income at the end of each month after bills were paid. A 2014 Joseph Rowntree study found the cost of necessities has gone up 28% since 2008, but earnings have only gone up by 9% in the same period. tight-budget

However, budgets often fail because they are unrealistic or because people don't understand what makes them succeed. Before you scoff at a budget for your sparse income, try creating one and, more importantly, sticking to it.

Give yourself a goal
Do you want to be debt-free within a year? Do you aim to have a certain amount of money in a pension? Are you still trying to get three months' worth of expenses into an emergency savings account?

Whatever the goal, write it down and keep it somewhere you can see it when you're about to spend. Make it your phone's screensaver, or tape it to your credit card. The visual reminder will be there when you need it most and make you decide whether the purchase is absolutely necessary.

Keep track of your money
Make a note of every expense. Small purchases can add up quickly. Keeping a list of each one can help you become aware of where your money is going, and can help you determine which purchases are essential and which are luxuries.

And it's important to give yourself a clear line of what counts as an essential. It's easy to justify purchases to yourself. Keeping a list that your entire family can see can help you refrain from indulging in an expensive coffee each morning, knowing that someone may call you out on it later.

You may also find it helpful to take out a set amount of cash at the beginning of each week and use only that cash for purchases. Seeing the money leave your wallet reinforces the fact that you are spending it, and may give you pause at the checkout. Leave your cards in a secure spot at home if you don't think you can resist swiping.

Employ the 50/30/20 principle
In this method, you set aside 50% of your net income for fixed costs, such as mortgage or rent and car payments. Then, 30% of the remainder becomes your supply for essentials and hobbies: food, petrol, eating out. The final 20% goes to the goal you set for yourself.

Enlist the help of prepaid debit accounts
If you really struggle with the concept (or discipline) of budgeting, prepaid accounts with debit cards attached can help. Such accounts include Ffrees, Think Money, the Post Office budget card, Card One and Secure Trust.

"We offer a bank account which is available for everyone -- you don't have to have a credit record," says Alex Letts, chief executive and founder of Ffrees. "Inside the account you can ring fence money into a pot -- we call it a "jam jar" -- that you can't accidentally spend and there is no overdraft facility so people can't get into debt."

Most prepaid accounts with debit cards are a variation of that concept; you earmark money for priority bills and debts to ensure you don't spend it on non-essential items.

"[They enable] you to prepay important bills, then live on the rest," explains David Black, banking specialist at Consumer Intelligence.

Andrew Hagger, founder of the money information service Money Comms, says that although budgeting accounts tend to charge a fee, they can be useful if you really struggle with your finances.

These accounts not a cheap option, though, so you may want to opt for a basic bank account that doesn't provide an overdraft, but does provide a debit card with limited functionality, Black says.

Use a credit card as a last resort
Yvonne Goodwin, founder of Yvonne Goodwin Wealth Management, says you can use credit cards to manage large, one-off payments, such as a necessary household appliance.

Always pay at least the minimum payment on your credit cards, but more if you can to avoid interest charges. It's best to pay it off quickly to paying a lot of interest.

See related: Authorised overdrafts becoming more expensive for some, Are you a candidate for Debtors Anonymous?

Published: 13 August 2014