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Looking to start budgeting this year? Take control of your finances for the year head with our step-by-step guide to creating a budget that works for you
Why make a budget?
Having a workable budget in place is an important first step if you want to start managing your spending this year.
A good budget should help you cover all your day-to-day expenses as well as work towards your longer-term financial goals. That could be a anything from a summer holiday or new car to becoming debt free or saving for an early retirement.
Financial stability comes from effective budgeting – and the best budgets always leave room for a treat or two!
Ready to get started? Here’s our step-by-step guide to creating a new budget for the year ahead:
1. Start with your income
First things first, you’ll need to grab a pen and paper or open an Excel spreadsheet. While you might be an expert at mental arithmetic, budgeting works best when you can write everything down.
Next, you’ll need to note down your monthly income – the money that enters your account in a typical month.
This will usually be your salary after tax, but if you earn any regular income from your side hustles be sure to add this into your budget too.
If you’re self-employed and have a fluctuating income, look at how much you earned last year and divide that amount by 12 to work out an average monthly income.
2. Track your typical month’s spending
Now you know how much money you have to play with each month, it’s time to look at how you currently spend it.
Try to choose a month that reflects your normal habits rather than one with unusual spending like December or one where you spent two weeks on holiday.
January can be a great month to start tracking as you’ll usually be back to your regular routine and all your outgoings with be based on new year price increases.
Open your banking app or get a copy of your bank statement and take note of every purchase made and bill paid.
Don’t be tempted to skip an expense because it’s only a few pounds or you think it’s a one-off. Those spontaneous coffees and big nights out need to be included in your budget.
3. Divide your expenses into needs and wants
With all your spending laid out in black and white, the next step is to divide each expense into either a want or a need.
Your needs will be your essential spending and usually include things like:
Your wants will be those payments that you could live without if you had to and might include things like trips to the cinema, meals out, takeaways, drinks at your local pub, streaming services like Netflix, or tickets to see your favourite team play every other weekend.
There’s also a third category of expenses that fall in-between wants and needs. Your food shop, for example, is a need as you have to buy food to eat, but some of your picks might fall into the want category. Don’t worry, we’ll explain what to do with these categories in step five.
4. Set a target
You’re much more likely to stick to your budget if you have a target in mind.
Depending on your circumstances, that goal might be putting 20% of your income towards paying off debt or saving for retirement. Maybe you want to have £100 spare each month that you can put towards your next holiday or you’re aiming to save £1000 as an emergency fund.
Don’t panic if you want to do all these things; you can adapt your budget and your goals throughout the year so that you spend the first half of the year paying off your debt, for example, and then spend the next six months splitting your extra cash between investments and a deposit for a new set of wheels.
5. Make adjustments to meet your goal
You might want to grab a calculator to complete the next step. Start by subtracting your essential payments – your needs – from your monthly income. The amount remaining is known as your disposable income and this is the pot you can allocate in your new budget,
Let’s look at an example:
Your monthly income is £2,000 and your essential costs add up to £1,100.
£2,000 – £1,100 = £900 disposable income.
If your goal is to pay off your debt as quickly as possible, you can then decide how much of your remaining £900 you want to allocate to your wants and those grey area expenses. You can use your tracked month to help you find things to cut.
You might have spent £200 on food, for example, but think you could comfortably bring that down to £150 with some smart swaps. Make sure you allocate a bucket for fun too – you’ll find it easier to maintain your budget long-term if you allow yourself treats like one meal out a month or a weekly takeaway.
Once you’ve decided how much to spend on each area, the remaining amount can all go towards your debt.
Your final budget for that £900 might look something like:
£150 Food
£50 Eating Out
£20 Subscriptions
£70 Entertainment
£50 Gym Membership
£50 Christmas Fund
£510 Debt Overpayments
6. Revisit your budget regularly
Your budget should be a working document. Once you’ve made a plan for the year ahead, put a reminder on your calendar to review it again in six months.
Life can be unpredictable; you might get a promotion and have more money to allocate, or you could be made redundant and need to drastically cut back for a period.
Your financial goals can change over time too, which will affect your budget too. Reviewing at least every six months can help make sure your budget still suits your current circumstances.
Looking for support with creating a budget and managing your debt repayments? Our friendly team of experts is here to help. Give us a call on 0161 8260 585 or send a message here
