Budgeting basics

A few weeks into the month, do you find yourself wondering where your wages have gone? If the answer is yes, you probably need a budget.

Creating a budget might seem a bit scary if you’ve never done one before, but it’s not.  A budget essentially helps you see how much money you have coming in each month and where that money goes. Creating and sticking to a budget means you are much more likely to:

Be in control of your money

• Avoid getting into debt
• Be prepared for unexpected costs
• Be able to spot areas where you can make savings
• Start saving for things such as a holiday, a new car or retirement
• So how do you create a budget? Well, here is a 6-step process to help you master the basics. Remember, this is your budget, so no one is going to judge you on it, but a budget only works if you are honest with yourself about the money you have coming in and where that money is spent.

Step 1. Get organised

Set aside at least an hour to create your budget. It's a good idea to gather all the paperwork you need before you get started.  As a minimum, you’ll need:

• your last 3 bank statements
• your last three months of pay slips
• recent credit card/store card/loan statements
• copies of your household bills
• details of your savings and pension contributions
• information on any other incomes you may have

The more information you can get together, the better and the more accurate the figures you use in your budget, the more useful your budget will be.

You can use the Better with Money budget planner to help create your budget, one of the free budgeting apps available online,  a spreadsheet or, in fact, a pen and paper. How you do your budget matters less than actually doing it, so do it in whatever way works best for you. If you live with a partner and share costs and bills, you may want to consider creating a joint budget.

Step 2: Calculate your monthly income

Work out how much money you have coming in each month.

If you’re paid regularly by an employer and your taxes are deducted automatically, use the net income shown on your payslip.

If you have other sources of income, such as state benefits, child maintenance, investment income or rental income from a property, include these as well.

List all your income on your budget and add the income list up. The total is your “monthly income”.

Step 3: Work out your essential monthly spending

Using the paperwork you’ve pulled together, list on your budget all the payments you make each month that are essential.

These are the payments you must make each month, such as housing costs (rent, mortgage, insurance, utility bills, council tax, etc), childcare, transport costs (public transport/vehicle costs to get to work), debt repayments (e.g., credit cards, loans, car, and phone finance) and food.

Some things that you may consider to be “essential” spending may not be, such as TV subscriptions, beauty treatments, alcohol, and smoking. So be honest with yourself. If you don’t need to spend the money to stay in a job, stay housed, adequately fed, or avoid defaulting on a debt/contract, then it’s probably not “essential” spending.

Once you’ve listed all your essential spending on your budget, add it up. The total is your monthly “essential spending” figure.

Step 4: Review your disposable income

If your “monthly income” is more than your “essential spending”, the amount left is your “disposable income”.

This is the amount of money you have available each month to spend on things that are “non-essential” such as TV subscriptions, going out and takeaways – the things that you like spending money on but don’t have to.

Next, you need to work out where your “disposable income” goes.

This may take a bit of thinking about and you may need to do a bit of ‘honest guess work’ as disposable income often includes spending on things we don’t really think much about: a magazine, a takeaway coffee, a movie download, an app purchase, a weekly treat, those sorts of things.

Think about an average day and an average week, and where your money is spent. Also, use your bank statements to identify places you frequently make card payments, online payments you make and cash withdrawals. List them all down and try to work out where you spend your money as best you can. 

You then include one-off spending you might make each year, such as at Christmas or on birthdays. Work out roughly how much you spend each year and divide the total by 12 – this will be the amount you should put aside each month and needs to be added to your budget.

Finally, if you don't have an emergency fund to cover those things that you don’t know about that could take your budget off track (e.g., car repairs, home repairs, school trips etc) add a line on your budget for "surprise expenses". Again, this will require a bit of guesswork but be sensible and honest with yourself – after all, the purpose of creating your budget is to help you be in control of your money.

You should now have a list of where you spend money on “non-essential” things, along with amounts for one off spending and an emergency fund. Add the list up.

If the total you have is less than your “disposable income”, you’re off to a good start. You should have money left at the end of the month which you can use to pay off debt, save for something special or to put towards your retirement.

If you are spending more than your “disposable income” you should take action to avoid getting into debt. Consider:

• Comparing the market for your essential bills and insurance to make sure you’re getting the best prices you can.
• Look at where you can reduce your non-essential spending such as cancelling memberships or subscriptions, cutting back on eating out and takeaways, shopping around for lower prices and less expensive options.

Step 5: Agree a budget you can stick to

A budget works best if it paints an accurate and realistic picture of your income, essential spending, and where your disposable income goes. By spending a bit of time creating your budget you will have a tool to hand which will help make your money go further each month and, by sticking to it, hopefully allow you to save some spare money each month. 

If you do have money spare each month, look to open an easy access bank account, and build up an “emergency fund” that will cover your “essential spending” for three months as it’ll give you added ‘peace of mind’ if an emergency does occur. Once you’ve achieved this, then think about saving for medium or long term goals.

Step 6. Review your budget regularly

Once you’ve created your budget, remember to keep an eye on how closely you’re sticking to it and adjust your spending accordingly.

Life is naturally unpredictable, so it’s also a good idea to review your budget and your spending at least every couple of months. Keep an eye on the large expenses that only occur every few months, such as insurances, if you get a pay rise, see how it’ll impact your ability to save, if household bills increase look at how they will impact your budget too. By keeping an eye on your budget and your finances you’ll notice more quickly if you’re overspending and will be able to make changes before your finances are drastically affected.

A top tip is to take a few minutes each day to record your expenses ( there are apps available but, again, a pad and paper works just as well). That way, the next time you review your budget you’ll have all the information you need to hand.

Ultimately, it’s your budget and it needs to work for you, not the other way around.