You may be up-to-speed with budgeting, but budget forecasting is next level. It helps you plan longer term for your financial future, by helping you set goals and targets. Budget forecasting organises your money and will do so much more for your pocket in the long run.
What is a budget forecast?
While a budget generally focuses on a relatively short period – a month, usually – a budget forecast will cover the next six to twelve months. Instead of taking immediate steps to see changes in a matter of weeks, this ratchets up the plan in a holistic way, adding in considerations for your financial development.
How to create a budget forecast
Step 1 – Start with the basic budget
Comparatively limited as it is, the basic budget – which you can get help creating here – is the starting point for a budget forecast. You must first ensure that you do not have an overspend. If you do, take some time to rejig and bring your money out of the red. If you need tips on refining your budget have a look here.
Step 2 – Extend over the twelve months
Next, you must extend your budget across your chosen time period – twelve months, ideally. Literally copy and paste for every month.
Step 3 – Consider seasonal changes
Next comes the creative part :You must add in income and expenses fluctuations. For example, consider the payments that are not fixed monthly but will certainly feature in the now extended period. Simply replicating from a month into a year won’t give you the full picture – a car MOT won’t necessarily appear in your month’s budget, but it will feature later. Christmas spending could be another spanner in those works, so do you plan to save monthly for Christmas or take the hit in December?
If you are having trouble getting your head around this, break down your expenses into fixed and variable.
Fixed costs stay the same every month and are generally harder to change – mortgage, rent, electricity. These are usually easier to forecast as you are likely to enter the same amount for the full period.
Variable expenses change frequently and you generally have control – groceries, gym fees, petrol. You’re likely to have an idea about these so pop that in as a starting point – there’s no harm in starting and tweaking as you go along.
Step 4 – Goals and targets
You will need to consider your goals and targets. What would you like to achieve? Why are you creating a budget forecast? To save for your first investment property, pay off debt or to buy a car?
Get very clear on your goals: dates, amount required, motivation. Then factor these financial goals into your budget. Break down your goals and identify clearly what it will take to get you there. For example, a savings target of £1,500 in ten months’ time equates to saving £150 a month, so account for this in the forecast. Write your goals down, stick it on your wall and check the progress regularly.
Step 5 – Remove budget drains
Like you did with the basic budget, it’s time to spot budget drains. Remove them, and work on getting better deals and increasing income. A budget forecast is important for everyone, but acutely vital for those whose expenses and – particularly – income fluctuate throughout the year.
Other things to consider
A budget forecast is an opportunity to tackle harmful spending habits, and also a chance to work towards paying off debt. You should also focus on building up an emergency fund (aim for six months’ expenses cover), and increasing savings.
You achieve this by putting money aside and being prudent. Consider your personal circumstances and allow it to dictate the order of prioritisation.
If you’re in seasonal work, for example, or simply earn more in commission in certain months, you cannot neglect the maintenance of a budget forecast. The same goes for the self-employed/freelancers.
If money is tight, identify where expenses can be cut – are you getting adequate use from subscription-based television and on-demand services? Do you need all the benefits included in your mobile phone contract?
And look into supplementing your income too. Do you have a car garage, or even parking space, but no car? In some areas, renting this out could be a gold mine. What about those other hidden skills of yours? Could they be used to your financial benefit in your spare time? A spare room? Could a lodger provide welcome income?
I won’t claim budget forecasting is painless, but it can be a remedy to poor financial health. As always, knowledge is power. And the empowerment that comes through being aware of how you can meet your financial targets should lead to a brighter horizon. The discipline of a budget forecast is vital, as a goal without a plan is but a wish.