Budgeting Explained

Budgeting explained

By Laura Rettie, Personal Finance Journalist. Last updated 1st May 2024.

Laura Rettie

Budgeting is often the last thing we want to think about. But a well-planned budget helps you manage your finances, track costs and meet your financial obligations.

What is budgeting, and why is it important?

Do you notice you’re always short of money at the end of the month? Are you struggling to cover all of your monthly expenses? This is a reality for many of us, especially in the current climate.

You may think the only answer is to have a bigger income, but it can be tough to increase the amount of money you bring in every month. Budgeting is a way to keep track of your money and ensure you’re using it sensibly.

Creating a budget involves looking at how much money you have coming in (from things like your employment, universal credit or your pension) and then comparing that to your monthly outgoings (the things you know you have to pay each month like your mortgage, rent, utility bills, transportation costs etc).

Budgeting can feel tedious at first, but in the long run, it can help you make smarter financial decisions, help you to work out where you can lower your spending, and even help to save for things like holidays or a new car.

How do I create a budget?

Creating a well-thought-out budget can take a bit of time, but spending this time can help you immensely.

There are several different approaches to budgeting, and the best method for you will depend on your personal preferences.

You can use traditional methods, such as manually working out and writing down your budget or using a spreadsheet.

Alternatively, you could use a budgeting app; some banking apps now have some really handy budgeting features.

Before you start to work out all your known monthly costs, it’s also helpful to look further ahead; what are your financial goals?

Are you wanting to buy your first house or do you have your eyes on a new car? If so, when you create your budget it’s a good idea to budget for savings to put towards the things you have your heart set on.

Here’s a step-by-step guide to creating a budget:

1. Work out your total income:

Add together your sources of income (after deductions like tax, student loan payments and pension contributions). This can include salary, pensions, benefits or any other regular income you may have.

If you’re doing a household budget, add together all sources of income for anyone within the household.

2. Collate all of your essential expenses:

Work out your fixed monthly expenses; what do you need to spend every month? You should include things like:

  • Mortgage repayments or rent
  • Commuting costs - If you own a car include insurance and fuel
  • Council tax
  • Utilities - Gas, electric, water, broadband
  • Mobile phone contracts
  • Insurance - Home, contents, travel, life, health etc
  • Childcare
  • Debt repayments
  • Pet expenses - Pet food, vet’s bills, pet insurance
  • Groceries - Food, personal hygiene products, cleaning products
  • Subscriptions - Netflix, Spotify, Amazon prime etc
  • Gym or fitness classes

3. Include your annual or less regular expenses:

It’s common to need to pay for certain things annually rather than monthly, for example, ground rent, car tax, MOT, club fees, school trips, insurance, TV licence, uniforms etc.

It’s helpful to include these costs in your budget and put money aside for them each month. This includes any bills you pay annually, as well as things like opticians appointments, dental work, holidays, Christmas and birthday presents or servicing your car.

4. Take away your essential expenses from your income:

Once you’ve calculated all of your essential expenses and worked out how much you need to budget each month for your annual and socialising expenses, you need to take the total monthly figure away from your monthly income.

5. Divide your leftover money:

Hopefully, once you’ve taken away your essential expenses, you’ll have money left over; this is what you have monthly to divide between your savings and recreational spending. Recreational spending could include things like:

  • Eating out
  • Nights out
  • Beauty treatments and products
  • Takeaways
  • Clothes
  • Weekends away

It’s a good idea once you’ve created your initial budget to review it regularly, especially when your circumstances or spending habits change.

If, once you’ve worked out your budget, you don’t have enough money to cover all of your expenses, you’ll need to find ways to reduce your outgoings or supplement your income.

Try using comparison sites to find better deals on things like your car insurance, broadband and contents insurance or compare credit card deals if you want to transfer interest bearing debts to cards with a 0% promotional offer.

Always prioritise paying off any high-interest debts you may have, and look for ways to reduce your regular outgoings like swapping where you do your food shop or reduce the number of times you go out for dinner in a month.

If this isn’t going to cut it, you may need to work out ways to increase your income; this may include getting a second job, getting a new job that pays a higher salary or doing freelance work on the side.

If this isn’t viable, find out if you’re entitled to any extra support on the Gov.uk website. 

If you’re struggling financially, visit Citizens Advice or Money Helper for free impartial advice.

How can I stick to a budget?

Having a budget can help you to reach your financial goals and can prevent you from feeling overwhelmed by your finances. But sticking to a budget can be challenging for many.

Keeping your spending within your budget requires discipline, and it may take some time to master; here are some tips on helping you to stick to your budget:

Track your spending

If you don’t keep tabs on how much you’re spending, it’s impossible to budget properly. You can use your banking app, budgeting app or pen and paper to track when you spend money. Try creating a habit of noting down how much you’re spending on a daily basis.

Avoid impulse spending

It can be easy to get caught up in sales, shopping trips and spontaneous nights out, but impulse spending can seriously damage your chances of sticking to your budget.

We’re not suggesting you don’t treat yourself from time to time, but make it a habit of checking you’ve got the money in your budget before splashing your cash.

If something crops up that you weren’t expecting, you’ll need to re-jig your budget and shave the money off elsewhere to ensure you don’t overstretch yourself.

Use separate accounts or pots to manage your spending

This is an increasingly popular method to help you to budget. Some banking apps like Monzo allow you to keep your money in separate pots to help you budget, but you can also use separate accounts to do this.

For example you could have a bills account, a savings account and a spending account. When you get paid each month you transfer the amount you need into each account, which helps you to visualise your budget.

Pay down debts and lower your credit limits

Prioritise paying off your debts, especially if you’re paying high rates of interest.

Once you’ve paid down your debts, lower your credit card limit to stop yourself over-borrowing and building up more debt.

Find ways to save money

Whether it’s cutting the cost of your food bills, or finding a better deal on your mobile phone, cutting down your monthly outgoings can help you stick within your budget.

Plan ahead

If you’re making plans with friends, or you’re planning a holiday with family, make sure you budget not only for things like the flights and accommodation, but also for spending money when you’re there.

It’s a good idea to plan your fun money a full year ahead and start to set money aside for events as soon as you know they’re happening.

The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.