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How to make a budget

Whether it’s your first time managing your own money or you’re just looking to have a better grip on your finances, making a budget will give you a clearer idea of what you have to spend. But budgeting can be overwhelming, especially if you don’t know where to start!

From the basics of budgeting for beginners to tips for staying on track, we’ve put together a guide to help you stay in control of your money.

Young woman at home planning family budget and finances.

Making a household budget

Before you even start making your budget, you first need to know how much money you're spending and what you're spending it on.

The best way to do this is by looking at your spending over the past few months, so you have a balanced view of where your money is going.

For example, we tend to spend more money in December, so when making a budget in January you should be looking at your expenses in November or even October.

1. Choose how to make your budget

From apps and good old pen-and-paper, there are many ways to write a budget.

We recommend you choose an option that is easy for you to use and look at often, as you should be checking your budget against your spending throughout the month. Here are some of our favourite options.

  • Budgeting apps
  • A spreadsheet on your computer
  • A notebook you can carry with you

Once you’ve picked a medium that works for you, it’s time to start budgeting!

2. Write down your income after tax

This is one of the easiest parts of budgeting, as many people will have a fixed salary that stays mostly the same every month. If you have secondary sources of income, make sure to include those as well.

If you’re self-employed and your income fluctuates, take the time to add up all the money you’ve earned in the past year and find out what your average monthly income is. You might have some lower months, but sticking to your budget should help you stay on track. An emergency fund could also help to give you some peace of mind if you do have some lower income months.

3. Gather up all of your expenses

Go through all of your bank statements, write down everything you’ve spent money on.

You should also label any repeat expenses, such as bills and subscriptions, to make it easier to organise your spending later.

When it comes to the food shop, you probably do more than one a month and the amount you pay at the till will be different each time. We recommend looking at the total you’ve spent at the supermarket each month and figuring out what your average monthly spend is.

Top tip:

Keep an eye out for any subscriptions that you’ve been paying for that you didn’t realise you had.

This can happen a lot if you forget to cancel a free trial!

4. Categorise your spending as “needs” and “wants”

This is the most important step of making your budget. Go through your list of outgoings and work out how much you’re spending on essentials and how much you're spending on non-essentials.

Label everything as either a "need" or a "want".

Here are a few examples of expenses and how you might split them:

Needs

  • Rent or mortgage payments
  • All of your bills, such as electricity, council tax, internet, TV license, etc.
  • Minimum debt repayments
  • Transportation costs, such as bus or train tickets, refueling your car or bicycle maintenance costs
  • Your average monthly food shop

Wants

  • Monthly or yearly subscriptions, such as streaming services
  • Meals out or takeaway orders
  • Non-essential purchases, such as extra clothes and home decor
  • Trips to the pub or coffee shops
  • Events and days out, such as going to the cinema or a concert

Your "needs" are non-negotiable, so the first step of working out how much you have to spend is simply to add these up and take them away from your total income.

What's left is money for savings, paying off debts and spending on non-essentials.

Income - total cost of "needs" = savings/debt repayments + spending money

As long as you can cover everything in your “needs” category you’ll be able to get through the month without getting into debt.

Top tip:

If you’re sharing household expenses with a partner or housemates, there might be also more opportunities for you to save money.

Some subscriptions services, such as Amazon Prime and Spotify, have “household” or “family” options where several people in the same household can share a single subscription fee.

5. Decide how much to put in savings and pay off debt

It's important to include your savings and debt repayments in your budget.

If building your savings is a priority for you, having a budget plan that you can stick to is one of the most powerful tools you can have.

Whether you're planning to buy your first home or just looking to upgrade your laptop, putting a small amount into savings regularly can make the difference between actually reaching your goal or just dreaming about it.

If you have any debt that you're paying interest on, it might be worth planning to pay some of that debt off each month to get those interest payments down. If you're not sure where to start, try to pay off the debts that have the highest interest rates first.

How much you put into savings and pay off debt is up to you and will depend on a lot of things, but the most important thing is to define a clear goal and keep up with regular payments.

If you haven't already, it can be a good idea to put savings and debt repayments in your "needs" column and perhaps even set up a regular direct debit for them so you're not tempted to use that money on something else.

That way, you’ll be building your savings or paying off debt without even having to think about it!

6. Weigh up your income and your outgoings

Now it's time to look at how you can manage your non-essential spending. This is where your budget really comes to life.

Of course, this will be different for everyone. The point isn't to cut out spending money on everything in your "wants" category, but to give you an idea of where you could save money.

Ideally, you should now know:

  • How much of your income goes towards necessary expenses (“needs”)
  • How much you're going to be putting into savings or using to pay off debts
  • How much of your income you have left as spending money (“wants”)

The golden rule is to make sure your total income is more than the amount of money you need for essential spending (you needs), plus what you're putting in savings or using to pay off debts, plus the amount you plan to spend on non-essential costs (your wants).

Income = needs + savings/debt repayments + wants

Read on to find out how to manage your spending money to keep your budget on track.

How to budget your spending money

Once you know how much money you have left in your budget for your "wants", you'll be able to start making some important decisions, such as where you could cut down on costs and where you could maybe afford to spend a little more.

This will be different for everyone and will depend on what matters most to you. For example, you might be happy to cut down on subscriptions to streaming services and put that money towards cinema tickets instead.

To help you put together a budget that works for you, here are some of the ways we suggest organising your spending money.

Set budget caps for different types of spending

One way to make sure you’re using your spending money wisely is by setting a “budget cap” for each category. A "category" can be anything you want to spend money on: eating out, clothes, holidays etc.

Setting yourself a limit on how much you'll allow yourself to spend in each category makes it less likely that you'll go over your total budget. But you still get to spend money on the things you enjoy.

If you're left with £400 after your needs and savings are taken out, here's how you might organise it.

  • £150 for dinners out or takeaway meals
  • £100 for new clothes
  • £100 for concert, cinema or theatre tickets
  • £50 for anything that might come up, like a friend inviting you for drinks or having to get a last-minute taxi

Split up your monthly spending money

Even with budget caps set, it can tempting to spend up to your limit when you first get paid, leaving you with nothing for the rest of the month!

One way to make sure you're getting the most out of your spending money is by giving yourself mini paydays throughout the month.

You could do this by setting up a "pot" or "vault" in your current account and putting half of your monthly spending money in it, then pay yourself from that "pot" when the middle of the month comes around.

Or, work out how much you have to spend each week and pay yourself from that pot weekly.

Make extra repayments on any debts you might have

If you're currently paying off debt, it's worth considering using some of your "wants" money to make some extra payments on top of your minimums.

By sacrificing some of your spending money to reduce your debt as much as you can, you'll eventually have more spending money every month as the amount of interest due goes down. You're also likely to end up spending less money on interest than you would do if you stick to only making minimum payments.

Plan ahead for future purchases or bills

We've all been caught off-guard by birthdays or a pesky yearly bill. If you know you'll have to spend money on something you don't usually pay for every month, you can put money away at the start of the month, or even put a small amount away monthly, to cover these costs when the time comes.

For example, if you know your boiler will need servicing soon, you can dedicate a "pot" to it and put the money in as soon as you can, so you won't accidentally spend that money. 

Top tip:

Start a Christmas gift "pot" early in the year and put some money in every month. Putting £50 a month away for 11 months will leave you with £550 when December comes round. Then you can buy presents for friends and family without using up all of your spending money in December or going into debt.

You could also do this for birthday presents. Plan out how many birthday gifts you might have to buy throughout the year and how much you'd like to spend on each, add up the total and divide it by twelve. You'll then have the amount you can put away monthly to build up a fund that will cover every birthday gift.

Staying on track

You’ve built your first budget and set yourself some firm-but-fair limits, but now you have to stay on top of it. Here are a few ways you can make it easier to keep your budget on track.

Automate bills and savings

Money you don’t see is money you don’t spend. Set up direct debits for all of your bills, ideally right after payday, so you don’t have to worry about paying your bills on time.

If you’re currently working on a savings goal, we recommend setting up a regular payment into your chosen savings or investment account as well. This will help you make sure you’re building your savings before you even start spending your money that month. When you do this, make sure to add it to your “needs” category on your budget tracker.

Make good use of "pots" or "pockets" in your account to organise your money

Modern banking apps make it easier than ever to keep your expenses separate, through the use of "pots", "pockets" or "vaults" - they tend to all call them something different!

These are different sections within your current account that you can move money into to organise your money. You can use them to keep your "needs" money separate from your "wants" money.

For example, you could create a pocket in your account for all your regular direct debits to come of, such as bills, subscriptions and payments into savings. Then set up a regular payment into that pocket to cover the full amount.

Then you can make another pocket for your food shop, and maybe even make pockets for each of the categories you've set budget caps on!

You could also use separate current accounts for your necessary expenses and your spending money.

Adjust your budget as you go

It’s important to be aware that as your life changes, your budget should too.

Make sure to take the time to check your budget against your actual income and expenses at the end of every month, so you can note down any inconsistencies, such as an unusually high bill or a sudden necessary purchase.

Recalculate your budget if your income changes, as you might need to cut more costs if it goes down or be able to put more into savings if it goes up.

Set up an emergency fund

It's easy to be caught off-guard if you’re suddenly faced with a big expense.

An emergency fund can help protect you from getting into debt if something happens, such as having to replace a home appliance, repair your car or cover essential expenses if your income drops.

Take a look at our guide on building an emergency fund.

Practice makes perfect

Your first budget most likely won’t be perfect, and you might overspend and have trouble staying on track.

If this happens, don’t panic! Not every month is going to be the same, and that’s okay.

Remember that managing your money is a long-term project. Your budget will be something you work on over time and that should change as your life and your priorities change.

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