How to make a budget and stick to it
Budgeting is an essential financial skill that helps you take control of your money and make informed decisions about your spending.
In this guide, we’ll cover the importance of budgeting, step-by-step instructions for creating a monthly budget, tips for beginners and popular budgeting techniques like the 50-30-20 budget rule.
We'll also explore the technology available to assist you in managing and tracking your budget effectively.
Why is budgeting important?
Budgeting is essential to help take control of your money, avoid overspending and achieve your financial goals.
Budgeting will help you to:
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Be in control - Budgeting will help you to allocate your income wisely so all your essential expenses are covered
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Save money - Effective budgeting can help you to identify where you can cut back, freeing up money to put into savings
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Achieve your goals - With a budget, you’re more likely to hit your personal goals, such as owning your own home, travelling the world or saving for retirement
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Reduce stress - Having a budget can help to reduce any anxiety you may have about spending and ensure you aren’t surprised by big one off annual costs, like car insurance
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Prevent overspending - A budget can make you stop and think before you spend, which can reduce impulsive purchasing
How do I create a monthly budget?
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Decide what tools you’ll use to create your budget - There are a range of budgeting tools and templates available to help make budgeting easy. If you use a mobile, it’s helpful to choose a tool you can access on your phone, so you can update it whenever you spend. There are several budgeting apps to choose from (see below for a list) or you can use the notes section on your phone. Alternatively, you can create your budget on an excel spreadsheet or in a notebook.
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Budget for the long term - Having a weekly and monthly budget is great, but the most effective budget will be one you create for an entire year. This is useful because you can budget for things that only occur annually, for example, Christmas, family holidays, school uniforms and vehicle expenses.
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Gather all your expenses - Make a list of your monthly expenses, making sure you include:
-Mortgage or rent
-Commuting costs
-Car maintenance costs
-Council tax
-Water
-Food
-Energy bills
-Cleaning products
-Broadband
-Mobile phone
-Debt repayments
-Childcare/School fees
-Insurances, e.g. Car, House, Life
-Digital subscriptions
-Gym membership
4. Estimate your monthly ‘fun’ money - Include:
-Eating out
-Birthday presents
-Days out
-Takeaways
-Beauty treatments
5. Estimate your significant annual expenses;
-Christmas
-House repairs
-Car repairs/MOT
-New glasses
-Weddings
6. Write down your income from your employment - include any benefits or pension you receive.
Add up all your outgoings and subtract it from your income.
If you have money left after subtracting, consider putting your money into savings for the future, or paying back loans with interest more quickly.
If you’re spending more than you have coming in, it’s time to look at where you could bring more money in or cut back on what you’re spending.
What is the 50-30-20 budget rule?
The 50-30-20 budget rule is one option to help you to budget effectively.
The rule suggests allocating 50% of your income to cover your essential needs, such as your mortgage or rent, utilities, council tax, food and transport.
30% of your income is then spent on fun money like eating out, hobbies, holidays and entertainment.
Finally, 20% of your income should then be allocated to savings, investing or paying down debts.
What is the 40-30-20-10 budget rule?
The 40-30-20-10 budget rule is another option for splitting your spending.
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40% to cover essential needs, such as housing, utilities, food and transportation.
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30% for fun spending like dining out, entertainment, hobbies, and non-essential purchases.
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20% to savings and investments. This category includes contributions to pensions, savings, and long-term financial goals.
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10% for paying down debts, such as credit card balances or loans.
These rules are meant to provide a balanced approach to managing your finances. Whether you find either one of them useful will depend on your circumstances and personal financial goals. For example, you may not be able to bring your essential spending down to 40% if you live in an expensive area where a high amount of your income has to be set aside for rent or mortgage.
Ultimately there is no set way to determine how you should spend your money - the aim is to create a flexible budget that works for you and your family.
What budgeting apps are available to help me?
Budgeting apps can be helpful in managing your finances and achieving your financial goals.
Many apps can sync to your bank account and credit cards, giving you a clear picture of where your money is going.
Budgeting apps also offer insights into your financial habits, making it easier to identify areas where you can cut back on spending and save more. Additionally, they provide reminders and alerts to help you stay on track with your budget and avoid overspending.
The apps below are just a few examples of services that allow you to track your expenses in real time, categorise your spending, and set spending limits for different categories.
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Emma, Cost = Free - £14.99 per month depending on plan
Emma helps you set financial goals, categorise your spending, and tell you where to save money. You can separate your money into savings pots, invest in stocks and shares or find cashback deals.
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Money Dashboard, Cost = Free
Money Dashboard is a budgeting app. It allows you to view all your current credit and savings accounts in one place. The app lets you track and categorise your spending and create budgets.
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Plum, Cost = Free - £9.99 per month depending on plan
Plum is a savings app that connects to your current account. It looks at your income and spending habits, calculates how much you can realistically save and adds funds to your savings automatically.
