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Budgeting for beginners – avoid the end-of-the-month squeeze

Creating a budget and “living within your means” might sound like hard work, yet taking control of your money can actually be satisfying... and even empowering! If you don’t have a budget, you might find it harder to identify opportunities to cut back your costs and save for the things that matter.

Why bother with a budget?

Successful budgeting doesn’t have to mean stressing-out over every penny. The main goal is just to spend less than you earn in a month, so that you can save the remainder for a rainy day, or whatever your particular goal is. Building up a financial buffer is also a good idea in case you’re met with any unexpected surprises. Budgeting also helps you stay out of debt, which can in turn improve your credit rating.

Because shopping online or using your card or smartphone to pay in stores is so quick and easy, it sometimes feels like you’re not spending money at all. But a tap here and a click there can quickly add up. With a budget plan in place and a set amount of funds available to spend from each month, your bank balance will give you a real-time update of how much you have left to spend, enabling you to make more informed choices.

Record all your expenses and income

Gather as much information as you can about your monthly expenses. This includes fixed costs like rent and utilities, groceries, phone and internet, insurance, transport costs, gym membership, bank fees, online subscriptions, and so on. Next, brainstorm a list of variable expenses, such as gifts, gadgets and entertainment, such as eating out and concerts. Don’t forget irregular bills and costs that might only be due once a year. Old bank statements can give you clues to anything you’ve overlooked.

There’s no need for fancy spreadsheets—a big list with total at the end is also fine. If you earn money from multiple different sources, you’ll need to calculate your total income, too. Now you know what you need each month and – assuming your income exceeds your expenses - you can use this to work out how much of your income you’ll be able to save. (If your planned budget exceeds your earnings, you’ll have to rethink some of those variable costs.)

Pay yourself an allowance

The next step: turn your bank account into a monthly allowance. After your paycheck arrives, transfer everything in excess of your budget into a linked savings account. Some banks even let you set up an automatic monthly transfer. That way, every time you log in to your online banking, you’ll be able to see exactly how much money you have left for the rest of the month. If your account has an overdraft option, you can also set one up in case you’re faced with an unexpected cost at the end of the month.

If you’re worried about the prospect of watching your account balance shrink to zero each month, you could also do it the other way around. Keep your paycheck in your main account and move your planned savings amount (income, minus budget) into your savings account at the end of the month.

Budgeting tools

If you really want to geek out, there are plenty of online budgeting tools that you can use to calculate your budget. Most rely on you manually entering data and simply calculate your total costs broken down into various categories, although some can be linked to your bank account (for a fee) so you can monitor whether or not you’re sticking to your plan.

This kind of tracking and categorization is a built-in feature of the free N26 current account. Automatic spending categorization sorts your purchases into broad categories like “Food & Groceries” or “Shopping” and your monthly stats are presented as a simple pie chart in the N26 app. You can also view all the transactions in a particular category and see the total amount spent. If you feel like a category doesn’t really match your purchase, you can change it by selecting the transaction and choosing a category from the drop-down list.

If you want to take your analytics to the next level, you can even add personalized hashtags to individual purchases. Make them match your budget by tagging fixed and variable costs like #rent, #onlinesubscriptions or #transport.

Clarity and peace of mind

With your budget calculated and your allowance system in place, you’ll be less likely to unexpectedly run out of funds at the end of the month and more likely to see your savings grow. All that remains is to monitor your balance and tweak your budget if you notice that your estimated costs aren’t entirely realistic. And with tools like the Statistics in the N26 app, you can even clearly see areas where you’ve been overspending if you choose to cut back.

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