Making a budget is one of the best things you can do for your finances, although sticking to it can be difficult, especially when living costs are soaring.
Our bank balances are taking a real beating at the moment as prices keep rising, so here are some tips on how to make a budget that’s easy to stick to.
How do I create a budget?
Budgeting is a really useful financial practice that can help you understand your money and how you spend it.
It’s a good idea to set aside a couple of hours to get cracking with your budget planning, but it could take more or less time depending on how detailed you want to be. Some people will want to go into a lot of detail while others may be happy with a broader overview.
1. Work out your monthly income
The first thing you’ll need to do when creating your budget is to get an accurate view of how much you actually have coming in each month, so to get started, you’ll need to tot up your monthly income after tax.
You can count any money you receive regularly as income, including your salary, pension, income from buy to let property, benefit payments, maintenance and so on.
If you’re self-employed or work on a contract basis, you might not be paid monthly, so to get an idea of your monthly income it’s best to work out what you earn over the course of a year and divide it by 12.
If you get paid weekly, multiply your weekly income by 52 and then divide it by 12 to give you your monthly figure.
2. Make a list of your monthly spending
Once you’ve worked out your total monthly income, it’s time to work out how much you’re spending each month.
It’s important to note that at this stage, you’re only trying to understand what your spending looks like, not change anything. It can be tempting to start moving things around now, but it’s important to get an accurate picture of how you spend your money before you do anything.
Start by gathering together as much information as possible so you can base your budget on facts rather than guesses. You’ll usually be able to find the information you need through bills, direct debit agreements, bank statements and receipts. How far back you look at this information really depends on how detailed you want to be. If you want to understand your spending behaviours in detail, looking back at the last year can give you a lot of information, but if you’re happy with an overview, looking back over back over the last few months should be fine.
Once you’ve found your spending info, add it all up to see what your outgoings cost you each month. To help this feel a little less daunting, we’ve broken it down into categories to help you work through things item by item.
- Household bills
- Rent or mortgage payments
- Gas
- Electric
- Water
- Council tax
- Internet
- TV licence
- TV package
- Living costs
- Food
- Clothing
- Toiletries
- Home supplies such as cleaning products or non-food items you buy regularly
- Medical costs, such as trips to the dentist, prescriptions etc
- Home maintenance costs
- Finances
- Insurances, including home, car, medical and life insurance
- Loan payments
- Credit card payments
- Savings and investments
- Pension contributions
- Other regular payments
- Travel costs
- Fuel costs
- MOT tests
- Car maintenance
- Regular public transport costs
- Leisure costs
- Holidays
- Subscriptions
- Streaming services
- Gym fees
- Eating out/ takeaways
- Gifts for birthdays / Christmas etc.
As you work through this list, you’ll probably find that some items only crop up once a year, such as your MOT or Christmas and birthday presents. So for these ones, take the cost of it and divide it by 12 to give you the monthly cost.
3. Draw up your budget
Once you’ve got your monthly income and spending outlined, you should have everything you need to start planning your budget.
How you approach your budget is down to personal preference, and there are a number of ways to do it. Most people will find a way that feels natural and logical to them, but there are also a number of budgeting methods that you might want to consider. Take a look at our article 5 budgeting methods you might not have heard of for some inspiration. There are also free budgeting tools available which can help you work out how much you’re earning and spending – for example the Citizens Advice Budgeting Tool.
At a really basic level, you want your income and your spending to balance. So, if you subtract your spending from your income and you find you have a bit of money left over each month you might be able to move things around to support your longer term goals, such as helping children with higher education costs, or boosting your retirement savings. If, however, your outgoings are higher than the amount you have coming in each month, you’ll need to identify the areas where you might be able to reduce your spending.
Remember, there’s no right or wrong way to budget, and it’s unlikely that you’ll hit the nail on the head first time, so don’t be afraid to make tweaks if something isn’t working for you.
Four tips to help you stick to your budget
1. Shop around
Some of your costs will be pretty much set, like your rent, but you might be surprised at some of the savings you can make elsewhere. For example, you could potentially save money on your mortgage, insurance, internet, council tax and more. Have a look at our articles How to save money – 19 money saving tips and Seven ways to save on your household bills to find out how you might be able to reduce some of your outgoings.
2. Be realistic
An important thing to bear in mind is that for you to budget effectively, you need to be totally honest with yourself about what is realistic and what’s not. It’s very easy to get carried away and become idealistic when making a budget, but it’s unlikely you’ll find it easy to drastically change your habits quickly.
It’s usually better to begin by making small tweaks rather than overhauling your entire finances. Once you see the impact these tweaks can have, it’s likely to inspire you to make further changes.
3. Find your motivation
We all perform much better when there’s a tangible goal in place, and budgeting is no different. Ask yourself what are you trying to achieve with your budget? Are you hoping to channel more money into an interest of yours, a holiday, a new house?
Or maybe you are simply aiming to keep on top of your finances enough to create a small emergency fund to build your financial resilience. Whatever your goal, keeping it clear in your mind as you work towards it can be empowering, and is more likely to keep you on the straight and narrow. Find out more about setting goals in our guide How setting a savings goal can help you reach it.
4. Take time to reassess
Once you’ve created a budget, give yourself a trial month to see how it goes and if you’ve allocated things correctly. Towards the end of that month, sit down and see how you’ve fared. If you’re lucky, you might find that everything is working well, but more likely, you may need to make a few further minor changes.
What to do if your budget doesn’t add up
If you find yourself feeling overwhelmed by the budgeting process, or if things just won’t add up, it might be worth seeking professional help. Lots of people are struggling at the moment, and it’s really important to talk to someone who might be able to help sooner rather than later.
All of the following companies and charities might be able to help you, so don’t be afraid to reach out:
Citizens Advice – find your local Citizens Advice or phone (0800 144 8848)
StepChange – You can access their services either online or over the phone (0800 138 1111)
National Debtline – you can contact them through a webchat or phone them (0808 808 4000)
If any of these organisations don’t provide what you need, we outline more places you might be able to find help in our article Where to find help if you’re struggling financially.