We take a look at everything you need to know about planning and setting a budget, as well as how to enjoy life after you do so.
Budgeting is one of those things that many of us want to do, but rarely find the time to sit down and actually do. Yet making space to manage your money can bring a host of benefits. So how do you go about setting a budget? And how do you then stick to it? We take a look at everything you need to know about how to budget.
Over the last few months, many of us have found our financial situations impacted by the COVID-19 pandemic. As such, there’s never been a better time to sit down and draw up a financial plan for the future. We also look at some of the tools and tricks you can use when it comes to budgeting.
What is a budget?
A budget is essentially a spending plan. It takes into account all of your income and expenses and makes sure you don’t spend more than you earn. Budgets range in complexity, from a simple one-page sheet for personal spending to complex software programs for company-wide finances.
Budgets allow you to take into account your current financial situation, as well to forecast what your income and outgoings will be like in the future. They can be used by just about any individual or organisation that makes and spends money.
There are many reasons why you should know how to budget. First and foremost, it helps you get a hold of your finances. It teaches you what your financial situation is like, how much money you have, and allows you to set financial goals.
There are plenty of benefits that come from thinking more carefully about your money. These can be applied in both your personal and professional life:
It stops you from spending too much
There is a real problem with debt in the UK. Some estimates show that the average credit card debt per household was around £2,500 at the start of 2020. When it comes to other kinds of unsecured debt such as loans, car financing and overdrafts, some figures put this debt figure close to £14,500 per household.
Having a budget can help you from keeping your spending under control. You’ll better understand your household balance sheet and avoid taking on any unnecessary debt.
It helps you save
Saving money doesn’t always sound like a fun activity. Many of us want to enjoy life in the here and now without worrying about the cost. However, saving money can be hugely beneficial in the long run, and make life easier and more enjoyable further down the line.
A budget that includes money towards savings can help you buy your next big purchase when you can afford it. Often, this works out much cheaper than paying interest on a credit card or loan. It’s also incredibly satisfying seeing where your hard-earned money goes.
Similarly, a budget gives you the chance to build a nest egg for the future. Whether it’s for your retirement, your kids, or a future goal, a budget means some of what you earn is put aside for later. This also makes things far easier if you do run into unexpected costs, as you’ll have money saved to cover them.
It highlights bad habits
You might be wondering where your paycheck goes every month. By the time your bills and essentials are paid for, it can seem like the rest just evaporates. However, that’s rarely the case. In reality, it’s hard to keep track of every little purchase without a budget. You might tap your card to pay a few pounds here and there, but if you do it every day, it soon adds up.
Creating a budget gives you the opportunity to spot where your money is going. You can get a clear breakdown of what you spend, where you spend it, and how much you spend on different things. You a
It gives you transferable skills
Managing money is a skill that’s applicable in many different situations. Although you might start by managing your household budget, it doesn’t have to stop there. Balancing the books is a valuable business skill that can help you progress professionally.
By understanding how you spend your money, you’re better equipped to spot how organisations spend your money. If you’re looking to get into public financial management, understanding your own budget can be a good place to start.
It helps you reach life milestones
Your financial health is never as important as when you’re teaching important life milestones. If you’re trying to buy a house, it will be extremely difficult to get a mortgage if your account activity looks risky (even if you’ve managed to save a 20% deposit). You may also want to have money set aside before you get married or have children – thinking ahead means that you won’t worry as much about your spending when you should be focusing on your exciting new developments.
How to prepare for a budget
So, now that we know what a budget is and why they’re so useful, it’s time to figure out the details of how to budget. It might seem like a bit of a daunting task, especially if you’ve never really looked at your finances before. However, with a bit of know-how, you can soon be pulling the financial strings in your household.
Assess your income and expenses
The first thing you need to do is figure out what your financial situation is looking like. This means you need to gather things like your bank statements, payslips, bills, receipts, and any other financial records you have. It might take a bit of rooting around in your paperwork, but remember many online services now let you download past statements.
Try and aim for at least three months’ worth of records, but the more you have, the more detail you’ll be able to see. Your aim here is to get an average monthly spend so that you can see where your money is going from each paycheque (assuming you get paid monthly).
At this stage, you should also be looking at how much your income amounts to each month. So, as well as your salary, consider other sources of income. Do you get interest from savings and investments? Do you have a side-hustle or freelance gig? Do you expect to get a bonus or commission?
You should account for every form of income that regularly goes into your bank account. Add it up for each month and then divide it by the number of months you have records for. This is your average monthly income.
Calculate your essentials
When you’re thinking about your spending, the first place to start is with your essential or fixed costs. These are the regular costs that you have to pay each month regardless of everything else. Here are some examples:
- Rent or mortgage payments
- Utility and council tax bills
- Loan repayments
- Car repayments, insurance, tax, and maintenance
- Mobile contracts
- Gym memberships
Of course, you’ll need to consult your statements, bills and receipts to figure out how much you spend on each of these. As with your income, add together each months’ worth of expenditure and divide it by however many months you have records for.
Again, you’ll find that some services and apps will give you a breakdown of what you spend. Many banking apps now have features allowing you to tag your expenditure. Although this can make things easier, it’s not always entirely accurate, so make sure you double-check it against your own calculations.
Calculate your disposable income
Your disposable income is often where things become a little tricky. It refers to the money you have leftover once you’ve paid for all your essentials. However, without knowing how to budget, everything beyond your essential spending seems to be disposable.
When you’re looking at your financial records, make a note of everything you spend on non-essentials and start adding them up. This includes things like:
- Alcohol and cigarettes
- Nights out
- Cinemas, theatres, museums
- Games and hobbies
- Impulse buys
You might be surprised about some of the things that you regularly spend money on, but that’s ok. Understanding your spending is important, as it will mean you will know how to budget for these expenses in future.
Remember to also take into account any cash transactions you make. It’s tempting to put cash withdrawals into the ‘other’ category, but if you consistently spend it on the same things, you should account for that.
Calculate your savings
Along with your essential costs and disposable income costs, it’s worth taking into account how much you are currently saving each month. Consider things like ISAs, pensions, investments, rainy day funds, and even money you regularly put in your piggy bank.
You might not currently put much, or even any, of your money aside each month. That’s ok, as a budget means you can set realistic savings goals to build your wealth.
How to create a budget
So, now that you know where your money is going each month, it’s time to take control of your spending and draw up a budget. Your aim here is financial planning and budgeting. You want to balance your finances so that you’re not spending more than you earn each month.
You’ve got a variety of options when it comes to how to budget, so we’ll cover some of the most commonly used ones:
How to make a budget spreadsheet
One of the most common ways to budget is to use a spreadsheet to track everything. It’s reasonably easy to get started with this, although you might need to know some essential excel formulas to help you on your way.
With the more recent versions of Microsoft Excel, you’ll find that there are several premade budget templates. As well as things like household budget planners, there are one for events, expenses, and other financial aims.
A template is a good place to start as much of the hard work is done for you in terms of calculations. All you need to do is input the values and update the fields so they’re relevant to you. You can then determine how much you have to spend in certain areas each month and can update your sheet when you spend.
If you’re looking to learn more about how the program works, we’ve got a course on an introduction to Excel that can help you analyse your budget data.
There are all kinds of apps you can use to help with your budgeting these days. Some help you track your spending, while others help you reach your savings goals. You may also find that if you use a personal banking app, it has help on how to budget.
There are also third-party apps that can help you track your spending and reach your goals. Check out services like Yolt and Money Dashboard, both of which are free to use. You can connect your bank accounts and cards to these apps, and they’ll then automatically track your spending and make budget recommendations.
If you’re feeling brave, you could even build your own simple budgeting app with a tool like Python. If you’re new to programming, this course gives the perfect introduction and teaches some valuable skills.
If you’re looking to dig deeper into the finance fundamentals, personal finance software might be a good choice. These programs usually give a more detailed and advanced look at things like managing your finances, creating various budgets, and reducing debt.
It’s worth noting that many budget software options charge either a purchase fee or subscription fee. As such, they might not be worth it at this stage. However, if you want a truly granular experience from your budget calculator, it could be worth it.
Budgeting tips and tricks
If you’re looking at how to budget and need some inspiration, here are a few techniques you can use to get you started and keep you on track:
It can sometimes be hard to budget and save towards multiple goals at the same time. The pot method essentially means you create different savings pots for different purposes. You can then set up a direct debit to them each month. It doesn’t have to be a lot, but small amounts can soon add up.
With banking apps like Monzo or Starling, you can easily set up a variety of pots within your account. Some banking apps even allow you to send your virtual change from purchases into these pots.
It’s rare that your budget is going to be perfect at the first attempt. You might find that you end up with too little money at the end of the month or leftover cash without a purpose. It’s there for worthwhile reviewing your budget on a regular basis. You can then account for new regular expenses or remove any that are no longer relevant. You can also decide whether you can roll over unspent money at the end of the month or if you want to put that into savings.
How to keep on budget
Even after all the hard work that goes into creating a budget, it can sometimes be hard to actually see it through. Here are some tips to keep you on course:
- Make your savings a bill. To help you put money aside, make your savings one of the first costs you pay each month, just like the rest of your bills.
- Give yourself an allowance. When it comes to disposable income, set yourself a weekly amount that you can spend on luxuries. If you can, keep this on a separate or pre-paid card, so once you spend it, you can’t overspend.
- Make your luxuries at home. Small daily expenses add up. So, instead of buying a fancy coffee every day, learn to grind and make your own each morning. Instead of getting a meal deal for lunch, plan your meals ahead and cook in batches.
- Invest. If your savings accounts aren’t working hard enough for you, learn some of the fundamentals of investment to see what choices you have to make the most of your money. Doing so can help you better understand money.
How to eat healthily on a budget
One of the big extravagances that people often cut back on when they’re figuring out how to budget is food. It’s very easy to get carried away with your food expenditure. Regular takeaways, treats, and meals out can cost a fortune. Thankfully, there are plenty of ways to eat healthily on a budget:
Plan your meals
Make a weekly plan for what you’re going to eat. This helps you know ahead of time what you’re going to have. You can also learn about how nutrition and wellbeing are linked, so you can plan some tasty, healthy meals.
Create a list
Once you know what you’re going to eat, you can create an accurate shopping list. Make sure to stick to the items on this list, it’ll help you eat well and stick to your budget.
Cook in batches
By cooking meal portions for multiple days, you’ll not only save money, but you’ll also save time. Think about meals like Bolognese, ratatouille, chilli, curry and more. Keep an eye out for some superfoods you can add in too.
Of course, when you’re first learning how to budget, you’ll still want a cheat meal, and that’s fine. But it has to be an infrequent treat and something you factor into your budget, not a regular occurrence.
Look at the price per unit
When you’re shopping, look at how much items cost based on their weight. Although some items may look cheaper, it could be more economical to buy one that’s cheaper per 100g.
Shop in season
Local produce that’s in-season is often cheaper than something imported from far away (it’s also better for the environment). Keep an eye out for seasonal recipes and shop accordingly.
Buy frozen fruits and veggies
Fruit and veg are usually only in-season for a few months of the year locally. However, frozen products are often just as healthy and can be cheaper. You can also make them last longer.
Grow your own
Growing your own produce can be an incredibly rewarding project. As well as giving you some of the freshest food you’re likely to find, it can also help keep your spending down.
Pack your lunch
Spending £3-5 every weekday on lunch can soon get expensive. By batch cooking your lunch, you’ll soon see the savings.
How to still have fun on a budget
As with many things with life, budgeting is about finding the right balance. Although it is vital to save for the future, it’s equally important to enjoy life. Luckily, even with a household budget, you can still find fun things to do.
Although the COVID-19 pandemic may have impacted your summer holiday, there’s still plenty you can do to keep entertained. Here are some ideas to get you started when you’re learning how to budget:
Although the coronavirus may have curtailed these, for the time being, local events are usually a great and cost-effective way of having fun. Whether it’s public celebrations, movie nights, or festivals, admission is usually low or free, plus it supports your local community.
The great outdoors can offer an endless source of free entertainment. You can walk, hike, visit the beach, cycle, and more. Although some places will charge for parking and sometimes admissions, the cost is usually very low.
Online communities will often run free and low-cost events. Check out sites like Meetup (once the pandemic is over) to find out what sorts of things are going on. It’s the perfect chance to try something new and meet interesting people.
There are plenty of places that offer free admission days. Many museums, art galleries, and gardens will also give you entry for free. Check out the deals and days that are available.
Staying in and having fun is often far cheaper than venturing out. Why not host an online games night with your friends? The company is guaranteed to be good, and the drinks are always cheaper!
If there is something you want to do, such as a holiday or expensive trip, account for it when you’re looking at how to budget. You can put aside money each month until you can truly afford to go.