Counting the pennies

Watch any financial self-help show and you'll hear the word "budget". Whether the participant wants to pay off their mortgage in two years, stop being a spendaholic or quit the bank of mum and dad, the expert helping them out will always suggest that they draw up a list of the things they buy each week and allocate cash to each of them.

Best laid plans
In practice creating a budget and sticking to it can be a lot harder than it sounds. A recent survey for IFA Promotion revealed that just one in four of British adults have a budget which they stick to. Almost a third (31%) said they had attempted to budget but failed, and 14% said they had never even tried.

"This is partly due to people taking on responsibilities - such as buying a home or getting married - later on in life," explains David Elms, chief executive at IFA Promotion. "It's often only the serious events like these that trigger a real need to budget."

But according to Martin Lewis, creator of the website Moneysavingexpert.com, the dismal figures are a result of traditional budgets simply not working. "People calculate budgets on a month-by-month or week-by-week basis which omits significant spends such as Christmas, birthdays and holidays," he says. As a result, they are doomed to fail.

To account for all of these expensive events, you need to look at your entire spend over a year, says Lewis. Only when you have done this can you calculate a realistic monthly budget.

Howevever, calculations that factor occasional costs such as holidays and weddings in to a monthly spend are pretty difficult to do with just a pen and paper. If you have time you could sit down with last year's bank statements and come up with a budget or you could go online and use an interactive spreadsheet. Lewis's site has a budget planner which you can download for free. Give yourself two hours to fill it in.

Piggy banking
A realistic budget which accounts for everything from pet food to cigarettes should be considerably easier to stick to than one that ignores some necessary expenditure. Introducing the concept of "piggy banking" can make things easier still.

"This is when you open five or six different bank accounts, each one for a different expense such as a holiday or car," says Lewis. "Each month, via direct debit or standing order, pay in a set amount to these accounts. Then, when you are ready for your summer holiday, the money will be waiting for you."

Organising your money this way might well leave less in your "spending account" than you are accustomed to, which could prove difficult to manage at first. In this case why not draw out your allocated spend from the cash point each week. This provides a tangible sum of money in your wallet that you know has to last for a certain number of days. Seeing what's left will also allow you to plan better - even if that means staying in all weekend.

In addition, as you go along, try to separate what you want from what you need, recommends David Elms. "Some things you really can't avoid paying for but there are plenty of things you don't need to buy, so get into the habit of working out which category the purchase falls into."

Once you are used to thinking twice about your spending you should start to see the savings start to mount up. After that, cheating on your budget will feel like stealing from your own purse.

Case study: Kirsteen Margetson and partner Dave Tweedale


Kirsteen Margetson, 28, and her partner, Dave Tweedale, 29, bought their first home last year in Wheathampstead, Hertfordshire. Money has been tight and the couple adopt an old-fashioned approach to budgeting. "Generally the culture with our generation is to have it now and pay for it later," says Kirsteen, who works as an adjudicator, "but we are trying to do it the other way round."

Kirsteen takes home £1,500 a month after contributions for pension, travel and healthcare has been deducted from her wages. She pays £1,000 into a joint account she holds with Dave. "This covers the monthly essentials such as mortgages, food, petrol and household bills," says Kirsteen.

From the remaining £500, Kirsteen allocates just £200 as her own spending money. "I draw this out in cash each week so I know where I am," she says. "The rest of it currently goes into to helping pay off our joint credit card - which we forced to take out when buying the house. However, we always make sure it is switched to a 0% deal."

Kirsteen pays off her own credit card in full every month and keeps some money aside for forthcoming events. "Each month I look in my diary to see what's coming up - weddings or birthdays for example - and make sure I have enough of the £500 put aside."

She adds: "Financially, we struggle on a daily basis, but are prepared to do so for now. With any luck, in a few years our money will go up and we will have less debt. We are happy now but still look forward to a better quality of life when we can afford one."