By Laura Rettie, Personal Finance Journalist. Last updated 31st January 2023.
We’d all love to be in a position where we don’t have to think about money; unfortunately, for most of us, this isn’t a reality. Thinking about your monthly or weekly budget may be the last thing you want to do; or perhaps you’ve never been taught to budget effectively.
It’s time to stop putting it off. Having a budget can help you take control of your finances, make sure you’re covering your expenses and even help you prepare for financial emergencies.
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.
Creating a well-thought-out budget can take a bit of time, but spending this time can help you immensely.
Start by creating a monthly budget, though you might find it easier to budget weekly, depending on how you get paid.
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.
There are also newer methods, such as budgeting apps; even 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:
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.
Work out your fixed monthly expenses; what do you need to spend every month? You should include things like:
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.
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.
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:
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.
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:
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.
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.
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.
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.
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.
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.