In this post I will set out some of the key reasons why setting a budget can (and hopefully will) help you shore up your personal finances and help you achieve your financial goals.

Lack of Wealth Is Caused By Ignorance

The above statement is not meant as derogatory to anyone who is not wealthy. The point I am making is that I believe one of the main reason most people either get into financial trouble (I am referring to debt problems here) or fail to be as rich as they could be is because they are simply unaware of the concepts of financial planning, investing and financial discipline.

I have heard many people say the reason they got into debt was because they simply lost track of their spending or they didn’t realize how much debt they had until it was too late or that ‘things simply spiralled out of control’. I firmly believe that most of these people could have avoided the stress and strains that excessive debt caused them by being more aware of their finance and planning their spending better. The most effective way to do this is by setting yourself a financial budget or spending plan.

Successful Businesses Do It

The aim of businesses (be they a small one man operation such as a plumber or a multinational corporation like Coca Cola) is to generate profit for their shareholders. Virtually all successful businesses do two things regularly, without which they would more than likely not be as profitable;

1. Produce Annual reports – to explain and analyze their profits and expenses
2. Set internal budgets – to control costs and help generate profit

Think about this for a minute. If it is common convention amongst business managers that these two measures are essential if the business is to stand a chance of generating profits and being successful, why do the vast majority of individuals not take a similar approach to their own personal finances?

Budgets Allow Financial Reliability and Predictability

Have you ever run out of money at the end of the month? Not sure if you can afford that holiday next year? I could go on but the point I am trying to make is that by doing a budget as part of your financial planning you can introduce some predictability to your finances. This means you can effectively plan for the future. This may be planning to move to a larger house in a couple of years time, it might mean planning a big night out next month or even an early retirement.

Makes you richer by putting your money to better use

Budgets can make you richer in two ways. Firstly one of the main benefits of setting a financial budget for yourself is that it helps your stop wasting your money. Budgets are great at trimming the fat from spending whether they are multi million pound corporation budgets or on a personal level they simply stop money being wasted.
If you budget well you’ll have an amount of money left at the end of each month which you would not otherwise of had. This makes you richer than you were before in the sense that your disposable income has increased, freeing money for you to spend on things you wouldn’t have been available to afford.

Makes you richer by allowing you to invest savings

OK so if you budget you can increase your disposable income as we have just discussed above. If you are even smarter you don’t spend [all] of that extra disposable income, but instead invest it.

By investing the extra/saved money you now have you can hopefully generate new income (assuming you invest it wisely – more on this later) and wealth that you previously didn’t have. This means that if you follow this approach your net wealth will increase over time, or in other words you will get richer.

1. Log all of your expenditure

OK so before you begin setting your budget you first of all need to understand where all of your money is going at the minute. By understanding in detail what you currently spend your money on you’ll be in a good position to make changes that will enable you to better achieve your financial goals.
There is an unlimited number of ways you could log your expenditure. Personally I make a note of every penny i spend throughout the day using my iPhone and a handy application called iExpensit however making a quick note in a small notebook would work equally well. At the end of every day I transfer all of the expenditure details into a Microsoft Excel spreadsheet. Every time i spend any money (even if only a pence on a chocolate bar) i log the following four pieces of information:

• Date
• Cost
• Description
• Payment Method

In addition I have a number of standing orders and direct debits that take money from my bank account to pay for items such as utility bills, car insurance etc. Every few days I check my bank statement online and add any expenditure to my log.
At the end of the month I have a complete list of each and every penny i have spent, how i spent it and what on. At the end of the month I move on to the next stage in my budgeting process: categorizing my expenses.

2. Categorize All Your Expenses

Staring at a great long list of expenses can be quite a daunting task. Doing so it can be very hard to quickly identify areas where you may be spending too much or can save money.
In order to make my expenditure list a bit more usable I categorize each piece of expenditure into the following categories:

• Rent/Mortgage
• Utility/Household Bills
• Groceries
• Eating Out
• Socializing
• Clothes Shopping
• Other Shopping
• Savings & Investments
• Travel/Transport

3. Analyze It

Now i have everything nicely categorized I do a quick bit of analysis. First up i create chart in Excel showing the amount of expenditure in each category over the month. At this point i have a direct visualization of my expenditure. Being able to ‘see’ where I spend my money allows me to immediately compare the proportions and types of spending I do.

Monthly Expenditure Chart

4. Identify Areas for Savings

Once you have created your spending graph outlined above you may well have identified a couple of categories of expenditure where you know you are spending to much. Even if you have you should analyse all of the categories to if there are any easy savings to  be made.

A useful method I have devised is to look at the individual items of expenditure in each category (the Excel filter feature is great for this) closely. I then force myself to write down two ways in which I could reduce my net expenditure in that category.

For some categories identify potential ways to save money is easier than for others. Below I have included an example from a budget I set myself a couple of years ago.

Categories & Potential Savings

Rent/Mortgage

1. Move to a smaller/cheaper apartment
2. Rent the spare room to a lodger

Utility/Household Bills

1. Cancel my satellite TV subscription
2. Move to a cheaper mobile phone tariff

Groceries

1. Buy less ready made meals and cook more meals myself
2. Buy more cheaper ‘own brand’ products

Eating Out

1. Only eat out in the evening once a month
2. Take a packed lunch to work instead of buying lunch out

When generating these ideas do not worry if some of them are seemingly impossible to implement (for example maybe you need your car to get to work so you can’t sell it). The idea is to simply brainstorm and get down at least two ideas to save money in each category.

5. Set Yourself Targets

As is the case with diets shock therapy may seem like the quickest approach but it rarely works. If you immediately try to stop all non necessary expenditure you’ll almost certainly become disillusioned and unsuccessful in your attempts to save money very quickly. As is the case with dieting you stand a much higher probability of succeeding if you make small consistent and incremental changes to your spending habits.

Out of the list you generated above select a minimum of five items to implement throughout the next month. The best way is to write them down in your Excel sheet. You now have a set of direct actions to do next month that will save you money. Be sure to refer back to this list every couple of days so you do not lose sight of your goals.

When setting your budgetary goals it is important to be realistic. If you set yourself targets that are too hard you’ll fail to reach them and will most likely become disillusioned

A good example of setting achievable/realistic goals came when I did my first budget. Rather than stating I would make a packed lunch to take to work every day I knew that because of the hectic nature of my lifestyle, and very long work hours this would not always be possible. Instead I pledged to take a packed lunch in at least twice a week. While the potential saving I made was less, i knew I was much more likely to achieve this and make the change a permanent feature of my weekly routine.

6. Allow yourself small rewards

While the aim of setting yourself a monthly budget is to save you money, you probably don’t want to do so by not going out, buying nothing and eating food you don’t like. The aim here is to save you money, not make your life miserable!

A good way to keep your motivation up is to allow yourself small rewards out of the savings if you are successful. For example why not treat you and the family to a meal out at the end of the month with some of the savings you make?

Budgeting Conclusion

Once you have worked through the above process and implemented a few of your savings approaches you’ll be amazed at how easy it all was. In fact very early on in the process you will most likely start questioning the money you spend on a daily process much more than you did in the past.

Do you have any useful money saving tips that have helped you reduce your monthly expenditure? If so we’d love to hear them or hear about your budgetary successes. Just leave us a comment below to share them with us.

I Am On A Tracker Mortgage

Luckily when I decided to re-mortgage my home loan and move away from my then lender Northern Rock shortly after they became one of the first victims of the financial crisis. Interest rates at the time were about 5.5% and I was very close to opting for a fixed rate mortgage deal. At the time however I felt that the Bank of England would reduce interest rates by a quarter of a percentage point in the following quarter so I opted for a tracker mortgage from First Direct.

My current mortgage deal charges interest at the Bank of England base rate (currently 0.5%) plus 0.47%, meaning I am currently paying only 0.97% interest on my mortgage. The net effect of this is that the current monthly repayment amount on my 20 year mortgage is well under half what it was when I took out the loan about 2 years ago, saving me a large amount of money each month.

I Regularly Make Mortgage Over Payments

With all of the savings I am making on my mortgage I could have significantly increased my monthly disposable income. Instead when interest rates began to tumble I instructed my mortgage company to keep my repayments at the same level, effectively making over payments to my mortgage each month. As rates began to fall further the size of my over payments compared to the regular payments began to rise significantly. As a result I am saving myself thousands in the long run without really noticing it in the monthly payments i make.

I Divert All Work Bonuses Into Over Payments

In addition to making regular over payments out of my monthly salary I also divert any financial windfalls into my mortgage account. Most of my work bonuses I have received in the last two years have been used to make one off mortgage over payments. In addition the odd tax refund, ebay sale of junk and any other little windfalls i have received have all gone toward reducing the capital of my mortgage.

I Make Small Sacrifices Everyday

Since embarking on this journey to reduce my mortgage I have paid much more attention to the small amounts of money I used to fritter away on needless expenditure. Below is a list of some of the simple things I have done that save me money on monthly basis. You’ve already guessed it, all of these savings become mortgage over payments.

• Walk or get the bus instead of the odd taxi
• Avoid eating out too much (restrict myself to a couple of times each month)
• Try to take a packed lunch to work instead of buying from cafes (this is a big saver)
• I question all purchases. Do i really need to buy that watch when i have one that works fine?
• I’ve sold huge amounts of junk on ebay, stuff i would never have used again and made a healthy profit doing so

I Make Extra Income Online

This has been another important factor for me in the last year or so. I have a few websites and blogs (including this one) that i have set up over the last couple of years and continue to maintain. This year I have realized the potential of a few of them to make money for me. There are numerous ways to make money online, i have concluded that no way is the right way. I tend to make my money by providing useful content to users on subjects that i am interest in.

I took a couple of online internet marketing courses that helped me learn the basics of internet marketing and now I am being rewarded by seeing my online income steadily grow month on month. I use all of this extra income I am earning to go towards over payments on my mortgage.

I Am Becoming Obsessive About Overpaying My Mortgage

Making mortgage over payments can be likened to a snowball rolling down the hill. The more over payments you make (and sooner you make them) the bigger their impact is. The more you overpay the more you save and the easier it is to see the impact of your over payments each month when that mortgage statement comes through the post. To me this snowball effect is a great motivator to keep over paying more.

Once i saw how £100 per month could save me over £20,000 I started a continually search to find more ways of finding an extra £50 or £100 to put towards overpayments each month. Overpaying your mortgage is definitly one of those things where the more you put in the more you get.

1. Re-mortgage to ensure you are on the best deal

Many many millions of pounds/dollars are wasted each year by home owners simply being lazy and not switching to the best available mortgage deal. Mortgage providers continue to make millions from lazy home homeowners that do not re-mortgage when their discounted or adjustable rate mortgages move out of their teaser rate period and back to the lenders standard variable rate.

To many people are scared off by the re-mortgaging process, fearing it as a complicated and painful process. While it can take a few weeks for the process to be completed it should actually be viewed as a way for you to easily save thousands of pounds. If you are serious about wanting to repay your mortgage early then you really should check to make sure you on the best possible deal.

2. Make yourself a financial budget

In order to repay your mortgage early you need to make regular, consistent over payments on your mortgage loan. To do so, and to ensure you can afford the extra money to overpay your mortgage we recommend you make yourself a financial budget.

To start you need to start tracking every penny you spend. Carry around a notebook for a month and jot down what you spend your money on. At the end of the month try and categorize all of you spending into categories such as: eating out, smoking, utilities, socializing, clothes, misc shopping, travel etc.

Once you can see where your money is going each month you simply need to identify areas where you can reduce your expenditure.  Then simply alter your budget so that rather than spending £50 per month in Starbucks on triple venti cappuccinos, spend £50 overpaying your mortgage.

Once you start this process you’ll probably soon start to question much more the things you spend you money on. Do you really need to take that cab home from the office instead of waiting for the bus? Wouldn’t your wife prefer a nice (an more importantly cheaper!) home cooked meal instead of meal out? The point is that once you start trying it is not hard to accumulate an extra £100 or so per month that can be used for over payments as opposed to being frittered away on non essentials. As we have seen an extra £100 per month can make a huge difference.

3. Rent a room to help pay your mortgage

One great way to raise some extra cash is to start renting out a room in your house to bring in some extra income. Not only will taking in a lodger bring in extra money but it may be tax beneficial too.

Here in the UK for example the governments “Rent A Room scheme” means you can rent a room and earn up to £4,250 a year tax-free (i.e. you pay no tax on these earnings). As well as being able to divert the rental income toward overpaying your mortgage you’ll also have a house mate to help contribute toward the utility bills, saving you even more money.

4. Consider trading down the property ladder

Where do you want to be in 10 years time? Do you want to still be living in town? Wouldn’t you want to be living a little further out, somewhere nicer to bring up a family? Maybe in 10 years you won’t need such a big house as the kids have left home?

Most people tend to move house as a response to a change in their circumstances such as having a child. Well why not try and preempt such a move and move now? Doing so may mean you end up moving to a cheaper house with a smaller mortgage.

If living mortgage free is you ultimate goal then why not sacrifice a little on the house you live in? Think about it – when you are mortgage free you won’t have to work 9-5 just to pay the mortgage anymore. Gaining a better work life balance may well be worth taking a step down the property ladder.

5. Earn some extra money on-line

An increasingly popular way to earn extra income these days is to start making money on-line. To prove a point this blog helps me earn extra income that funnily enough is going toward over payments on my mortgage! I run a variety of websites and blogs that bring in additional income for me.

You won’t have to Google making money online for long before you realize that there are literally a million and one ways to make money online. The best way to get started is to take a program such as this that will give you a precise blueprint to follow.

The theory goes that if you take out debt when inflation is high the size of your debt actually decreases in real terms over time, all other things being equal. Lets assume i take out a £100,000 mortgage loan and inflation is running at 5% per year. Assuming house prices do not increase in real terms, in one years time your £100,000 house would be worth £105,000. In five years this would be worth £127,628. You can see then that your £100,000 of debt has got you an asset (the house) that is worth £127,628. Of course everything else would have increase in price/value over this time (wages, cost of food etc), except your £100,000 mortgage.

When inflation is low (like it currently is) this effect disappears and you rely purely on the housing market rising, not the economy becoming inflationary in order to increase the value of your asset compared to your debt. As we have seen in recent years house prices do not always rise.

In addition to the above effect high inflation will mean your wages increase faster. This should allow you to pay off your debt quicker than if your earnings were not increasing at a faster rate. Again in the above example after five years your wages would have increased by 27.6% while your debt remained at a notional value of £100,000, therefore reducing the proportion of you income that goes on servicing your debt.

The reverse of the above is true. In a period of very low inflation like we are currently experiencing the real value of your debt does not decrease naturally over time. Therefore it make much more sense to reduce your debts as quickly as possible. For most home owners the most effective way of achieving this is to overpay their mortgage.

Take Advantage of Low Interest Rates

Assuming you are not on a fixed mortgage deal, low interest rates generally mean your mortgage repayments are lower. This means you should have more disposable income left each month which you can put towards repaying the capital on your mortgage sooner. By reducing the capital additionally each month you reduce the amount of interest you would have paid each month going forward. This can save you literally thousands over time as we explained in our last post where we showed how to save £21,000 on your mortgage by overpaying a small amount each month. The more you overpay the more you save and the quicker the mortgage gets paid off.

Can you afford repayments if interest rates increase?

Considering moving? After the recent credit crisis mortgage lenders now want higher deposits when offering new mortgages. In addition despite interest rates being relatively low, mortgage lenders are charging higher interest rates than they were before the crisis. That is to say that a couple of years ago in the UK it was possible to get a tracker mortgage that charged just 0.47% above the Bank of England Base rate. The very same mortgage now charges 2.75% above the Bank of England Base Rate.

What does all this mean? Well if at some point in the future you will be moving you’re going to need a new mortgage deal. That deal will most likely be relatively more expensive when compared to your current mortgage deal. In addition you’ll also need a bigger deposit to in order to get the best deal. As a result it makes a huge amount of sense to ‘make hay while the sun shines’ and take advantage of you current mortgage deal and low interest rates to overpay as much of you mortgage as possible. When you do come to move home and remortgage you’ll need a much smaller mortgage making it more affordable for you.

Over Pay Your Mortgage & Retire Early

Who doesn’t want to retire earlier? By overpaying your mortgage regularly, it is very easy to pay off your mortgage many years earlier than planned. If you no longer need to work to pay the mortgage then you may well be in a good enough financial position to take an early retirement. If you want to retire 10 years early then maybe you should consider starting to over paying your mortgage now.

Well put simply overpaying your mortgage is one of the most effective things you can do with your money. Too often people with mortgages look for ways to invest their spare cash such as building up large savings deposits. While this is by no means a bad financial strategy, few people realize the huge financial benefits that arise from overpaying their mortgage.

Save Thousands of Pounds

Perhaps the biggest benefit to be had from overpaying your mortgage is that you can easily save literally thousands of pounds. With very little effort each month you can save yourself huge sums of money in the long run.

Making regular mortgage over payments is the most efficient and effective way to pay off your mortgage early. Assuming you have a capital repayment mortgage each monthly payment you make will be partially interest and partially paying off the initial mortgage loan (often called the principal or capital amount). If you can make a regular overpayment each month, the additional money will go directly toward paying off the principal or capital part. This will mean that the amount of interest you will have to pay in the future will reduce.

Lets take a look at an example to see how this works.

Value of Mortgage Loan: £100,000
Interest Rate: 5%
Term: 25 years
Regular Monthly Repayment: £585
Monthly Overpayment: £50
Total Saving: £12,000!

In the above scenario if you just made the regular repayments you would end up paying back a total of £175,377: £100,000 of the original loan plus £63,124 in interest over the 25 years. By making a £50 overpayment on this mortgage each month would mean you only end up paying a total of £163,124 (a saving of over £12,000). In addition the mortgage would be fully paid off 4.5 years earlier (after 21 years instead of 25).

You can see from the above example the huge impact a small regular overpayment has on your mortgage and the total amount of interest you end up paying over the full term of the mortgage. If you were to pay £100 extra each month instead of £50, you would save a whopping total of £21,000 while managing to pay of your mortgage 6.5 years early.

Overpaying Your Mortgage Saves Time

As you can see in the above example overpaying your mortgage will usually mean you end up paying back your mortgage many years sooner than scheduled. This could allow you to retire sooner than planned or will boost your disposable income as you will be able to live rent/mortgage free.

You might decide once you have paid off you home mortgage early that you want to invest in a holiday home. Now that you have no mortgage to pay you should be able to buy and pay off such a holiday home far easier than if you were still paying off you residential mortgage loan!

How to overpay your mortgage?

Well the key as you can see above is to think small rather than not at all. Paying off a mortgage loan over 25 years can seem daunting however you can see above what a difference overpaying a small monthly amount such as £50 can make. So where can you find that £50? Below are some simple ideas to help you find extra cash to put towards your mortgage each month.

# Try making coffee at home instead of stopping off at the coffee shop each morning
Possible Monthly saving: £30

# Every other day place the loose change from your purse or pocket into a jar and
Possible Monthly Saving: £15

# Take a packed lunch to work each day instead of eating out
Possible Monthly Saving: £35

# Quit smoking (if you haven’t already!)
Possible Monthly Saving: £40

# Ditch that gym membership you no longer use and go jogging in the fresh air instead
Possible Monthly Saving: £35

The above are just a few possible ways you could save some extra money each month to help you pay off your mortgage early. In reality there are a million and one ways to help you find a little extra cash each month to help you overpay your mortgage.

When To Overpay Your Mortgage?

Well ideally you should be making over payment on your mortgage every month. However before doing so you should make sure you check the terms of your mortgage. Some mortgages restrict how often and how large any over payments can be. With some mortgages you will incur redemption penalties if you overpay too much or too often.

As discussed above the most efficient way to get the maximum benefit from your over payments is to make regular monthly repayments. Doing so ensures that you reduce the future interest charges you will face by as much as is possible.

In addition to regular payments another great way to overpay is to use any financial windfalls you receive to make additional one off over payments. Next time you receive a tax refund, small inheritance, lottery win or work bonus consider making a one off overpayment. Paying off large sums towards you mortgage will of course further help you reduce the amount of interest you pay on your mortgage loan in the future.

Another thing not to forget…

Of course all of this assumes you are on the best possible mortgage deal you can get in the first place. You could easily save even more money by simply ensuring you are on the best possible deal. If you are unsure if you are then the first step you should take may be to look into remortgaging to a better loan deal.