If you’re not yet budgeting, you should be.
What is a budget?
A budget is a way to manage your income more effectively. Creating a budget means looking at your monthly income and expenditure so you can see exactly where your money is going. This can allow you to minimise wasted spend and maximise your income.
Why should I budget?
By developing a budget, you can:
- Work out whether you’re spending more than you earn.
- Live within your means.
- Track all your expenses.
- Enjoy peace-of-mind over your spending.
- Work towards a financial goal, like saving or paying off debt and any short term loans that you may have.
Planning an effective budget – step by step
Start by getting together everything you’ll need to start planning your budget. This could include:
- Bank statements.
- Household bills.
- Mortgage/tenancy agreement.
- Other income.
To track your budget, use a simple Excel spreadsheet, Google Doc, free online tool or the humble notepad and pen – this will probably do the job just as well.
Top Tip: if you are including no spend days in your budget, there are a lot of free templates to download online that you can print and mark off no spend days. The more you plan, the more you’re likely to save.
Then work out how much you earn
The core of a budget is to compare your income and expenditure and see what your financial situation is. Work out how much you earn by listing down all your regular income. This could include:
- Earnings from your job.
- Interest from savings.
- Money from self-employment.
- Rent from properties you own.
Top Tip: there are plenty of opportunities to earn extra cash on necessary purchases through cashback websites. Some of the highest value cashback comes from switching utility providers and insurance. These can help you save towards holidays, Christmas, and birthdays, which is something we all need.
Next, work out how much you’re spending
To work out your monthly expenditure, gather together all your documents and record your monthly outgoings. These could include:
- Rent/mortgage payments.
- Bills – water rates, council tax, energy etc.
- Food spending.
- Mobile phone bill.
- Entertainment – streaming services, magazine subscriptions etc.
- Insurance payments – it is important to note here to shop around for your insurance.
- Charity donation.
Tip: Remember to factor in additional spending
A month-by-month plan is a good idea because it will give you a picture of your day-to-day spending. But to make it more accurate, factor event expenses such as:
- Rainy day fund (a good rule-of-thumb is 3 months’ outgoings.)
- Emergencies (boiler repair, washing machine repair, car breakdown etc.)
- Well-earned holidays.
- Birthdays and anniversaries.
Top Tip: most online banking apps have a breakdown of all your direct debits that are due out over the next 31 days. Are there any direct debits that you don’t need anymore? Maybe that gym membership you could swap for a daily run in the park? We often subscribe to services and products that we forget we are even paying for. Even £20 per month can equate to £240 a year!
Put what’s coming in and what’s going out side-by-side and subtract your expenditure from your income – then you’ll know whether you’re spending more than you earn or not.
If you’re in deficit each month, setting a budget is imperative to stop you getting into debt. If you’ve got more money coming in than going out, budgeting is still a good idea as it could help you save more money than you currently do.
Set up a budget
To set your budget:
- Cut out any unnecessary outgoings.
- Look for ways to save costs.
- Set out what you intend to spend each week/month – and stick to it.
To cut out any unnecessary outgoings, strike off any non-essentials – particularly if you really need to save money. These could include:
- Getting rid of your landline phone, just using your mobile phone.
- Cancelling any entertainment services you don’t use.
- Sell your second car.
- Skip your daily cup of coffee.
To save costs, make changes such as:
- Go to a cheaper energy provider.
- Switch your current account/ISA for a better interest rate.
- Draw up a weekly meal plan to save money on household spending.
A spending diary is also a good idea – this will help you identify more areas of excessive spending you could well cut back on. This doesn’t have to be a fancy diary; it can be a notebook that you decorate yourself and write all of your expenditure in. When it is in black and white in front of you, it can help you understand your spending habits.
Revisit your budget
It’s a good idea to test your budget out over the first few months, checking whether it works for you. Review your budget plan once a quarter, or when anything changes in your finances, such as a pay rise, added expense or something else.
Top Tip: many bank account providers give the option to round up purchases when you use your debit card, and put the extra directly into a separate savings account. This can be handy as it allows you to save money whilst not taking any effort and those extra pennies can soon add up to something that you really need (or want!).
If after reading this article you think that you may have picked up some bad spending habits, take a look at our Five ways to break bad spending habits article.
Generic advice is not a service regulated by the Financial Conduct Authority thus does not require authorisation.