Smart budgeting – how to keep tabs on your finances

Keeping your household finances in check can be a tricky business, so it’s crucial to have an effective budget in place. As well as the usual tried-and-tested ways of keeping tabs on your budget for the year, there are various approaches you can take.

We’d all love to have a bit more breathing space when it comes to our finances. But how do we do that without actually earning more money? Taking a closer look at your spending habits more closely and better managing your outgoings can help. As can planning ahead for regular expenses and paying bills as quickly as possible – waiting until the end of the month to pay bills gives you the false impression of having more cash than if you paid them right at the start of the month.

Account for special spending

To get a more accurate overview of your finances, try to think about your budget in yearly terms rather than using countless monthly categories. Why not open a specific account for leisure activities (including meals out and holidays in the next six months), extraordinary events (tax refunds, unexpected outgoings) and other large future expenses?

You could even set up a standing order from your current account to this separate account and watch the balance build up over time. Then if any unexpected bills arrive or the time comes for some renovation work on your home, you’ll have the money ready in the account. And transferring any tax rebates or other bonuses to this account will mean you can afford that dream family holiday, or even enough for a good deposit on a new home.

Writing down your household spending is not old-fashioned – it is a brilliant way to manage your personal finances.

Household budget books – a thing of the past?

Writing down your household spending is not old-fashioned – it is a brilliant way to manage your personal finances. But don’t worry. This doesn’t necessarily mean “writing down” in the traditional sense: nowadays there are various mobile apps and tools available to help, most of which come with a categorisation function. You can set spending limits and are sent notifications if you go beyond them.

When managing your personal finances, it is important to remember that each family member’s wants and financial priorities impact the whole family’s budget. So communication and open discussions about finances are essential. Imagine realising too late that you can no longer afford that long-planned family holiday, all because of a lack of communication! On the whole, as a society we tend to avoid discussing money worries, even with our partners. But it’s crucial to remember that regular communication can help reveal – and, most importantly, prevent – excess spending. Talking about money can also help stop debts spiralling out of control, something which more and more households in wealthy countries are experiencing.

In its annual report “How’s Life? 2020”, the Organisation for Economic Cooperation and Development (OECD) examined which of its member countries had the highest levels of household debt. It found that in almost two thirds of OECD countries households owed more than their disposable income. The average debt in 2018 was 126% of disposable income, ranging from 43% at the bottom end to 281% at the top.

Objective figures

Studies have shown that, in general, couples with a joint account tend to use the money in there for important family spending. And couples generally buy fewer luxury items since they can impact the household’s overall budget.

For your household budget to be effective, make sure to list every household member’s income, outgoings and savings in detail and objectively.

For your household budget to be effective, make sure to list every household member’s income, outgoings and savings in detail and objectively. The budget also has to reflect reality as closely as possible, so review it regularly and make sure it’s up to date. It goes without saying that a financial adviser can help you plan, review and correct your household budget, but it’s you who is best placed to understand your family’s – or household’s – requirements.

How to manage your budget

Follow our seven-step guide to manage your finances effectively:

1. Identify your sources of income
If you live beyond your means, you’re bound to find yourself with too much debt sooner or later. So before you consider your spending, it makes sense to first list all your income streams: salary, rental income, dividends, pension, social security, unemployment benefit, etc.

2. List your monthly expenses
Make sure you track everything you spend – even loose change for the coffee machine!

3. Categorise your outflows
Sort your spending into categories: housing, food, transportation, insurance, family, healthcare, tax, leisure, gifts, etc. To make their clients’ lives easier, many Luxembourg banks provide a categorisation tool as part of their online banking service.

4. Identify variable expenses
Determine whether your expenses are fixed (rent and charges, mortgage repayments, telephone/internet, home insurance, etc.) or variable (shopping, leisure, fuel, medical expenses, holidays, etc.). Make sure to go into detail for this section.

5. Define your goals
Once you have a solid overview of your finances, you’re in a better position to analyse your spending habits, make any necessary changes and, most importantly, set goals. This exercise will also help you identify and avoid unnecessary spending.

6. Draw up a budget for the year
Knowing how much you spend each month will let you to make longer-term plans. Remember to budget for unexpected expenses.

7. Stick to your budget
This step is undoubtedly the hardest to master. But if you keep a constant eye on your finances, you’ll be able to stay on track.