How to budget

Working out a budget can help you avoid overspending and lets you see exactly where your money goes – it’s the key to financial security and staying out of debt. See how easy budgeting is to do.

Working out a budget can help you avoid overspending and lets you see exactly where your money goes – it’s the key to financial security and staying out of debt. See how easy budgeting is to do.

Anelda Knoesen
From the Money team
7
minute read
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Posted 8 JULY 2021

Why budget? 

The foundation of managing your money is knowing how to budget so you don’t spend more than what your income is and avoid getting into debt. Ideally, budgeting will also help you have enough money to save and invest so you can afford to buy property, grow your wealth and have a secure retirement.

How to budget your money monthly 

Knowing what your income and outgoings are over a month is the start of working out a spending and savings plan for the year. 

Creating a budget is so much easier to do these days, thanks to technology. For example, there's a number of apps or calculators - from your bank or other providers - that can help you get on top of understanding your financial situation.

But if you’re not a technology fan, don’t worry – sitting down with pen, paper, calculator and your recent bank statements will also do the job.  

Total up your income 

The simplest place to start is by setting out list of what you’ve got coming in from your salary or wages and any other income, like renting out a room, for example. Also include any benefits you’re entitled to. Add it all up for the week or the month, whichever way of budgeting suits your situation better.

Work out your outgoings 

Next, work out your outgoings. It can be easy to forget things that you pay for once a year or every few months, so trawl through your bank statements to make sure you haven’t missed anything. 

When you list your expenses, it can be helpful to group things together under particular headings. For example: 

  • Rent or mortgage
  • Household bills
  • Travel/car costs
  • Health costs, like the dentist/optician or prescriptions
  • Loan and credit card payments
  • Entertainment, eating out, takeaways and other treats
  • Clothes and shoes
  • Childcare costs and other child-related expenses
  • Other expenditure – you may want to group this further if you can make useful categories, like hobbies, charitable donations or pet expenses 

Don’t forget to include any subscriptions you might have too, such as Netflix and Amazon Prime. 

See where your money’s going 

Grouping types of expenditure together is a key step as it will help you work out where you’re spending the most and identify potential areas where you could cut back. 

It can be a big wake-up call for some people to suddenly realise just how much, say, they’re spending on nights out or clothes, while for others it can provide reassurance that everything’s on track. 

Total up your income then take away your expenditure and you’ll confirm whether you’ve got a positive or negative budget. If you’ve got a negative budget – where you’ve got more going out than coming in – you need to act fast to stop overspending and start dealing with any debts.

Learning how to budget 

Once you’ve got all your key figures you can start putting together a budget. 

Think of your spending as discretionary and non-discretionary. 

  • Non-discretionary spending includes the bills you have to pay – your mortgage or rent, the household bills, car expenses and loan payments. 
  • Discretionary spending includes things like entertainment and treats – where it’s up to you whether you spend money or not. 

Subtract your non-discretionary spending from your income. What’s left is the amount you’ve got for discretionary spending and saving.

For example, if you had a take-home pay of around £24,000 a year, you’d be making £2,000 a month.

If your mortgage, household bills, costs of travelling to work and running a car, loan repayments and all the other must-haves came to £1,400 a month, it would leave you £600 per month for discretionary spending.

That £600 would need to cover entertainment, clothes, eating out, holidays and savings. To stay within budget, you couldn’t spend more than that until you got paid again.

Plan ahead 

But remember, just because you’ve set a typical monthly budget, it won’t necessarily work for every month. 

It’s helpful to see if your budget is positive or negative throughout the year or how one-off big expenses, like an annual bill, affect you. 

To avoid struggling if this happens, it’s a good idea to build up money in reserve for times where your expenses are much higher than usual – so you don’t have to dip into an overdraft

When you work out your budget you’ll be totalling your bills for the whole year and then averaging this out across the year. In months where the bills aren’t as high as the amount put aside for them – don’t spend the surplus. It’s there for the months when the bills are higher than your budgeted amount – to help smooth out the ups and downs. 

Find a strategy that works for you 

We’re all different and we don’t all think about money the same way, so it’s a good idea to consider how to make your budget work best for you.

For some people, fixing a maximum amount they can spend on different categories works. Others find it easier to manage by setting a fixed total amount for a week. It may be that a mix of both works for you. But in all cases, when you’ve reached your limit you must stop your discretionary spending. 

Banking and apps can make budgeting simple

In the past when cash was used far more widely, people put money for different types of expenditure into jars or envelopes. Some budgeting and banking apps allow you to put money in separate pots in your account – and take the money out of that particular pot when needed. 

Another way of making budgeting simpler is to open a bills bank account. On pay day, you can make a payment from your personal account into the bills account and payments would come from there. Ideally you’d pay in a bit more than the total you’d worked out in your budget, to allow for price rises and unexpected bills.  

A bills account can also be a good way for couples, or people sharing a house, to manage shared expenses. You could even run it as a joint account if that’s helpful.  

Using a budget to save  

It’s never a good idea to spend right up to the edge of your budget, as you won’t have anything left for unexpected expenses. To cover these, it’s a good idea to start an emergency fund. You may also want to think about saving for Christmas, your next holiday or a home deposit too. 

Build your savings into your budget, and set up a direct debit to your savings account so the money goes out of your current account when you’re paid.  

You don’t have to have your savings account with the same bank or building society as your current account. But some providers offer regular savings accounts with a much higher rate of interest than their standard savings accounts, so it’s worth seeing if your bank does this. 

Using a budget to get out of debt 

If you’re in debt, take a hard look at your budget to see where you can cut back to free up money so you can repay more of what you owe. Look at each of your spending categories and see what you could give up. 

If your essential spending is more than your income or you’re worrying about debt, it’s probably a good idea to get in touch with experts who can provide proper debt help.

How to flex your budget 

Keep an eye on your budget through the week or month to make sure you’re sticking to it and adjust it by cutting back if you have any unexpected expenses. 

If you change job, get a pay rise, move home or one of the kids moves out, it could also be a good time to see whether you’re able to save more or have an extra treat now and then. 

Things aren’t set in stone, so review your budget at least once a year, or sooner if there’s a significant change. With rising prices, you’ll need to check whether you’re putting aside enough for bills, or if you need to cut back on your spending to take account of those increases.

And make sure you’re not paying more than you need to by comparing energy, phones and broadband, home insurance and car insurance to see if you can get a better deal.

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