If you asked many people how they think they spend each month and then compare their estimate with the actual figures, there is a good chance that there will be quite a difference between the two.

Whilst most of us know exactly how much they spend on mortgage or rent payments and utility bills, it is the small purchases like a daily coffee on the way to work or a lunchtime treat that often don't get accounted for but can add up to a reasonable amount of money going out of your bank account each month.

If you are considering applying for a loan then you should certainly consider working out a budget of everything that you spend so that you can accurately see how much you can comfortably afford to repay each month.

Here is a look at how to work out a budget and why it is important to do.

Are you overspending?

If you find yourself short of money each month and think that a loan from a company like Buddy Loans will help you to get back on track and allow you to manage your finances more easily, then you could be right, but it makes sense to first look at your finances and see whether you actually spend more than you earn.

You can sometimes instinctively know whether this is the case by virtue of the fact that you are depleting your savings and building up a few debts here and there. Rather than rely on a gut feeling, it is much better to write down or put on a spreadsheet every single penny that goes in and out of your bank account each month without skipping on any items that might seem insignificant like that daily coffee.

Once you have all the information to hand you can quickly and accurately see where all your money goes and also be able to work out where you can make savings and importantly, whether you can afford the repayments for the loan you are thinking of applying for.

Sorting out your finances

Loan Application FormIt is often a good idea to use a budget planner that has been designed for the purpose of helping you to sort out your finances, as it prompts you to enter amounts for items that you might forget to include if you were listing them out from memory.

Many people tend to rely on their bank balance as an indicator of how their finances are looking, but the problem with this method is that the figure you get when you check your balance at the ATM is simply a snapshot of your financial position at that moment and will not reflect payments that are due to come out or what you have still got left to spend before you next get paid.

Some people have a series of piggybanks for saving up for different things like a gas bill or maybe a planned holiday, and you could use this method to sort out your finances more easily by setting up a series of bank accounts where you transfer money to cover specific bills.

Having separate accounts for different purposes might just help you to keep greater control of your finances but whichever method you choose, working out an accurate budget is always a good idea before you apply for a loan.

Vince Lambert is a whiz with personal finance. With years of experience working with numbers, he often blogs about budgets, investments, and loans for the important things in life.

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