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.
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.
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.
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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