How to budget
For all the algebra, history and geography you might have learned at school, there's a life skill you might not have been taught: planning a budget.
Without a household budget, you're simply spending blind, unaware of where exactly your money's going. It might work for a while, but if you hit a financial hurdle, or you want to make the money you have go further, planning a budget is a must.
If you have a financial goal - such as getting out of debt, saving for a mortgage or putting money away for retirement - it will help you work towards this too.
Here's our five-step plan that you can follow to create a comprehensive budget. If you already have a budget drawn up, skip ahead to our tips on balancing and managing a budget.
How to make a budget
Follow the five tips below if you've never budgeted before, or if you're just looking for a financial fresh start.
1. Get organised and take your time
Set aside at least an hour to create your budget. Rushing it could lead to mistakes.
It's a good idea to gather all the paperwork you'll need before getting started, so get hold of:
- a few months' worth of bank statements;
- your recent credit card bills;
- copies of your household bills;
- details of your savings and pension contributions;
- information on any other income you may have.
A lot of this 'paperwork' will be virtual these days, so it might be best to open up several tabs and emails on your phone or laptop or print things out if you think it'll help you.
In the example below, our budgeter is paid a monthly salary and they do occasional freelance work on the side. If your main income arrives more frequently, you may prefer to make a weekly or fortnightly budget.
2. Add up your income
Here's our example of the 'income' section of a budget. We've included multiple forms of income just to show how that would work, but you may well just need to include your monthly salary here (which would be much easier).
| Regular income | Jan (month 1) | Feb (month 2) | Mar (month 3) | Monthly average |
|---|---|---|---|---|
| Salary | £1,665 | £1,665 | £1,665 | £1,665 |
| Freelance income | £150 | £50 | £200 | £133 |
| TOTAL | £1,815 | £1,715 | £1,865 | £1,798 |
Jot down your regular earnings from employment (after tax, student loan payments, pension contributions, etc. have been deducted), then add other sources of income, from savings, investments, self-employment, etc.
Calculate what you earned in the past three months and note down the average so you have a rough idea of what you might expect to earn in the coming months.
Tip: now might also be a good time to ensure you're paying the correct amount of tax. For help with this, see our guides on tax codes.
3. Calculate your essential spending
Next, jot down how much of your monthly income goes towards essential spending.
Categorise these payments, so you have a good idea of where your cash is going. Your categories could include mortgage payments, utility bills, groceries, childcare, travel etc.
| Regular income | Month 1 | Month 2 | Month 3 | Average monthly |
|---|---|---|---|---|
| Salary | £1,665 | £1,665 | £1,665 | £1,665 |
| Freelance income | £150 | £50 | £200 | £133 |
| TOTAL | £1,815 | £1,715 | £1,865 | £1,798 |
| Essential spending | Month 1 | Month 2 | Month 3 | Average monthly |
| Rent | £780 | £780 | £780 | £780 |
| Utility bills | £299 | £278 | £303 | £293 |
| Groceries | £146 | £150 | £200 | £165 |
Look at your bank statements, household bills and credit card bills for this task. The more accurate your figures are, the more useful your budget will be.
Calculate your total expenditure for each of the past three months and subtract this from your monthly earnings. This will show you how much is typically left for 'non-essential' spending each month which will form your disposable income.
4. Review your disposable income
Next, it's time to add a layer that looks at how you spend your disposable income.
An accurate review of how you've previously spent your disposable income will prevent you from under or over-budgeting in certain areas.
Note how you've spent your disposable income in the previous three months. If you put money into savings, note down how much money you store away each month too.
| Regular income | Month 1 | Month 2 | Month 3 | Monthly average |
|---|---|---|---|---|
| Salary | £1,665 | £1,665 | £1,665 | £1,665 |
| Freelance income | £150 | £50 | £200 | £133 |
| TOTAL | £1,815 | £1,715 | £1,865 | £1,798 |
| Essential spending | Month 1 | Month 2 | Month 3 | Monthly average |
| Rent | £780 | £780 | £780 | £780 |
| Utility bills | £299 | £278 | £303 | £293 |
| Groceries | £146 | £150 | £200 | £165 |
Tip: at this point, you may discover you're regularly spending more than you earn. Our guide to paying off your debts could prove useful in this scenario.
5. Draw up a budget you can stick to
With an accurate picture of your average spending now at your fingertips, it should be easy to draw up a monthly budget you can stick to.
Use your average earnings and compulsory spending figures for the past three months to estimate how much disposable income you'll have in future months, adding in any one-off payments you know are on the way.
From there, you can set a reasonable budget for your disposable income, along with achievable savings targets.
You might want to try using a budgeting 'rule' at this point. Many people find using the 50/30/20 rule helpful. It involves spending 50% of your income on essentials, 30% on leisure/non-essentials, and putting 20% in savings.
| Regular income | Month 1 | Month 2 | Month 3 | Monthly average | Adjustments | Month 4 |
|---|---|---|---|---|---|---|
| Salary | £1,665 | £1,665 | £1,665 | £1,665 | +£0 | £1,665 |
| Freelance income | £150 | £50 | £200 | £133 | +£0 | £133 |
| TOTAL | £1,815 | £1,715 | £1,865 | £1,798 | +£0 | £1,798 |
| Essential spending | Month 1 | Month 2 | Month 3 | Monthly average | Adjustments | Month 4 |
| Rent | £780 | £780 | £780 | £780 | +£0 | £780 |
| Utility bills | £299 | £278 | £303 | £293 | +£0 | £293 |
| Groceries | £146 | £150 | £200 | £165 | +£0 | £165 |
In the example above, our budgeter reduced their spending on alcohol, leisure and 'other' to keep their outgoings below their income. It might be tempting to reduce the amount you're putting into savings, but that money will be important if you ever face an unexpected expense such as a home repair or increased bill. Budgeting is about being prepared for things like this, not just maximising your disposable income.
Tip: you can keep up with the latest best rates on savings in our guide to how to find the best savings account.
- Find out more: if you wants to go further the Money Helper Budget Planner tool is a free budget calculator that offers a place to record your spending, gives you a breakdown of your finances by category and offers personalised tips based on your information.
Top tips for sticking to your budget
Once your budget's in place, it's sadly quite easy to lose track of it and switch back to autopilot. The tips below will help you stay on track with your financial goals.
1. Cut the cost of your debts
If you have existing debts - particularly on credit cards - these are likely to be an expensive drain on your budget. With most credit card providers charging typical APRs of up to 19%, owing even a modest amount on your plastic could cost a significant sum in the long run.
Taking out a 0% balance transfer credit card could cut your interest costs dramatically, allowing you to pay off your debt more quickly. In turn, this will speed up the process of balancing your budget.
However, it's important to clear your debt before the end of the 0% period to avoid being charged at the standard APR on the remaining balance.
Find out more: 0% balance-transfer credit cards explained
2. Haggle or shop around to cut your bills
If your budget doesn't balance or you're looking to free up some extra cash, you could try to cut the cost of essential household goods and services. The changes you make aren't likely to make you feel deprived - but they will help to keep more cash in your pocket.
So don't just accept the renewal quotes you receive for utility bills and insurance. Shop around to see what other providers are offering, and try haggling with your existing provider to see how low it is willing to go to keep you as a customer.
Find out more in our guides:
- How to haggle for better home insurance deals
- How to haggle for better car insurance deals
- How to haggle for better broadband deals
- How to haggle when buying a second-hand car
3. Be brutal with your leisure spending
If your budget still doesn't balance, it's time to cut back on non-essential spending. This means prioritising the activities you get the most enjoyment out of and spending less on those that aren't offering you good value for money. How far you have to cut back your leisure spending will depend on your personal situation.
Spending less on going out and buying new things isn't easy - but not cutting back now might mean you're in an even more difficult position later. Remember, if your budget is out of balance in the long term, you'll end up with debts that could be expensive and may take a long time to clear.
4. Generate extra cash where you can
To complement cutbacks in your spending, consider new ways to increase your income.
First and foremost, if you have savings and investments you're relying on to generate part of your income, make sure they are performing as well as possible.
In addition, consider freelance work if your employment contract allows it. Are there ways you could use your skills to generate a little extra income by working in your spare time? (Don't forget that if you do earn money through freelancing, you'll need to fill in a self-assessment tax return.)
You could also sell unwanted items via online marketplaces such as eBay, consider renting out your spare room, or sign up to rent out your car when it isn't in use.
Even simple changes to your routine, such as using a cashback credit card instead of your debit card for everyday spending (and paying back what you spend each month), or making online purchases via a cashback website, could help you generate hundreds of pounds extra each year.
5. Separate your cash into different pots or accounts
Dividing up your income each month and depositing portions into different pots - perhaps one for bills and another for spending on yourself - should help you avoid overspending in a single area.
Some people may choose to open up a second current account specifically for this purpose if they don't already have a 'spare', while some banking apps such as Monzo allow you to create these pots within the same account.
Although it's a useful technique for anyone prone to losing track of how much money they have left for 'fun' each month, this 'piggy banking' or 'jam jar' method does mean keeping your eye on several sets of bank statements or getting familiar with different features of your banking app.
Find out more: six banking app features that can help with your bills
6. See all your accounts in one place
Keeping an eye on what money you have flowing into, and out of, your accounts each month is also crucial if you're keen for your budget to stay balanced.
But if you have a lot of different bank accounts and credit cards to keep on top of this can be time-consuming.
Some people find it simpler to manage their budget via apps that use open banking. Open banking budgeting apps are useful for getting an overview of multiple bank accounts and credit cards in one place.
Find out more: get our take on the latest open banking budgeting apps to see what these programs could do for you
7. Regularly reassess your budget
Finally, the key to managing your budget successfully is to ensure you revisit it - and revise it - on a regular basis. As your personal circumstances change, your budget will need to be amended, too.
We'd recommend revisiting your budget each month. This way, if you're continuously overspending, you'll notice quickly and will be able to readjust before it affects your financial goals too drastically.
Getting a promotion or pay rise should mean you rework your budget. While it may seem like an opportunity to loosen up your purse strings slightly, failing to take account of an income rise in your budget could mean you spend it randomly and don't truly make the most of it.
Each time there's a change in your situation that will have an impact on your finances, be sure to look at how your budget can accommodate this.
Find out more: best and worst bank accounts
Get debt help if your budget won't add up
If you're still struggling to balance your budget after cutting back on spending and are concerned about the amount of money you owe, it's important to seek help as soon as possible. Spending more than you earn each month isn't sustainable in the long term, and will push you further into debt.
There are free debt advice services that will help you assess your situation and come up with a plan for dealing with your debts. Read our guide on how to pay off your debts and free debt advice contacts for more information about how to tackle debt.
Our experts would always advise steering clear of commercial debt management companies that will charge you a fee for the same services you could get free from charities such as the StepChange Debt Charity (formerly the CCCS), National Debtline or Citizens Advice.
Find out more: free debt advice contacts
- Have you successfully used our tips to help save or make money? We'd love to hear from you. Get in touch at money-letters@which.co.uk.