Five steps to creating a budget that works for you

Having an idea of exactly how much you spend in a month, compared to what you earn, is the first step towards putting you in control of your money.

Creating a budget... you’re probably thinking there’s no time for that, in between juggling your job, home and everything else life throws at you. But it’s simply about tracking how much you’re earning and spending.

Once you’ve done the sums you’ll be able to work out how much you have available to spend each month, whether it’s on essentials or those treats like a new gadget or a weekend mini-break. And you could save some money along the way.

Budget basics

A good budget should:

• Chart your income, outgoings and financial goals, and give you a spending plan to follow
• Put you in control – when you know exactly where your money’s going, you’ll likely have more confidence in your finances
• Be flexible – if you get a windfall or save money by switching utility provider, your budget can be adjusted to reflect that

How to set up your budget

A budget won't take too long and there are lots of tools and apps that can help you. However you choose to chart your earnings and spending is up to you.

Here are five steps to get your budget underway:

1. What's your income?

Record your earnings every month:

• Your income after tax and deductions (don’t guess – look at your payslip)
• Any other income: it could be from freelance work, rental income, benefits, or a second job or side business

2. How much are your fixed costs?

List your fixed costs (time to delve into those bank statements). If you’re doing a monthly budget and there’s an annual outgoing like insurance in your list, divide it by 12.

Your fixed costs could be:

• Mortgage/rent/council tax
• Utility bills (gas, electricity, water), internet and phone
• Entertainment (such as streaming services and subscription channels)
• Groceries (monthly estimate)
• Gym membership
• Transport (car, commute, bike)
• Insurance (house, car, pet, life)
• Childcare and children’s expenses – school dinners, after school lessons, clothes, pocket money, books and toys

Don’t forget about debt: list your credit card balances, loan payments, overdrafts and any other money you owe.

3. What’s your goal?

Do you have an overall goal – like saving for a new car or paying off a debt? Let’s say you have £5,000 to pay off on an interest-free credit card. It will take just over two years to pay it off if you allocate £200 a month – or 18 months if you increase the payment to £278 - thus avoiding any interest payments (if the interest-free term is for two years). See how much you can set aside for your target, whether it’s a direct debit straight into a savings plan, or paying down credit card debt.

4. The budgeting part

Now it’s time to crunch the numbers. Take your income, minus the fixed costs (including the goal we just talked about) and the result should leave you in the black.

If it doesn’t, what can you adjust to help you get there? Are there subscriptions or services you could cancel which you no longer use? You’ve got the power when it comes to being in control of your money, so it’s important you’re happy with what your numbers are telling you. That’ll make it easier for you to follow your budget.

5. Nurture good habits

Being on top of your money requires you to track your expenses every month, because no two months are the same. Your annual car insurance premium could be due in August, and September could bring a burst of spending on school supplies.

So, if you find yourself with an extra £50 in your account, take a step back before you spend it on something you probably don’t need, and think about whether there are any bills or essential expenses it could go towards.

By knowing what your disposable income is, you’re more likely to stick to spending only that.

Why is a budget important?

Budgeting might seem like something to tackle further down the road, but if you start yours today and dig deep into your fixed costs every month you might see there are savings to be made.

If you’re in control and have a plan for your money, you’re in a stronger position to handle sudden expenses. In fact, a budget can be one of the best ways to help build up your very own emergency fund.

And when it comes to paying off debt, what’s better than seeing that debt knocked down every month while your budget tracks it?

A budget brings rewards

A budget isn’t there to hold you back from enjoying life, in fact it’s the opposite. It gives you freedom to save for the fun stuff, like a blowout meal or that luxury break. You’ll have the power of knowing what you have available to spend (or save). And you’re less likely to overspend, too.

Having a budget is a great first step in a more secure financial future for you. It can put you on the path to living your best life because you’re on top of your money.

More reading on budgets

• The Kakeibo budgeting method
• How to budget when you're a student
• How to throw a memorable wedding celebration on a budget