At its most basic, a budget is just a list of what you spend and what you make.
Some people prefer to think of their budget as a spending plan instead, since it should also tell you how much you can afford to spend each month.
I like to think of it as a budget for the boring stuff, such as paying my bills, but then as a spending plan for the money I get to enjoy.
If you want to know how to create a budget and stick to it, you just need to follow these five simple steps:
How to Create a Budget and Stick To It
1. Work out Your Outgoings
Working out how much you are spending can be a bit shocking and depressing – did you really spend that much on coffee last month? It can also be time consuming and fun too, so it’s best to set aside a free afternoon to get it done.
Start by collecting all your financial information together, including bank and credit bank and credit card statements, bills, and receipts.
Use these to write a list of everything you spend. It helps to organise it by category (such as rent, toiletries, or eating out) and to split it into weekly, monthly, yearly or less frequent spending.
Don’t forget to include any interest you’re paying on your debts and remember that your spending can change.
It can be better to think of the range you’ve spent over several months rather than a single figure, especially for gas and electricity bills, which can be a lot higher in winter.
2. Know Your Income
Working out how much money you have coming in should be a lot easier.
You may just have your earnings, after tax, but you should also include any interest on your savings if you have one, regular gifts, rental income, child benefit or support, or extra money you make by selling things online or babysitting.
Don’t include anything uncertain, such as your end of year bonus, as it’s best to think of these as lucky extras rather than something you depend on to balance your budget.
These lucky extras are great opportunities to build an emergency fund (if you don’t have one), pay down debts or start investing.
For example, a few years back, I received a £3,000 bonus, which I used to pay down my debt. This one off payment really helped me lower my monthly expenses by £200.
If you don’t have an emergency fund, this should be your first priority, check out our handy guide on how to build an emergency fund or download our free guide on how you could build up a realistic emergency fund in six months.
3. Decide on Your Goal?
Maybe you just want to balance outgoings and income to avoid using credit, growing your network. But having a specific goal in mind can help you stick to your budget.
Your goal will depend on your situation, but generally it is best to prioritise:
- First, building up some emergency savings. About £1000 will usually be enough to cover car repairs, a new boiler, or other unexpected costs so you won’t need to borrow more when something unexpected happens.
- Second, paying off your debts. Start with a small one so you can see the results quickly and boost your motivation to attack your other debts, then keep going until you’re debt free
- Third, setting aside pension contributions, or making voluntary National Insurance continuations if you have any gaps in your record that could affect your state pension
- Fourth, saving and investing for something you want and to secure your financial future, such as a holiday or a deposit on your own house or other types of investments to grow your net worth.
So, if you have a debt to pay off, your budget should focus on building up an initial emergency fund, but if you have no debts, focus on growing your emergency fund to at least 3 months’ worth of living expenses, a good pension, other savings and investments.
The good news is that you can always use your savings for whatever you want.
Related: Financial Goals in Order of PriorityHaving a specific goal in mind can help you stick to your budget.Click To Tweet
4. Find the Money to Make It Happen
Now that you know your goal, you need to find the money to make it happen. You can do this by looking back at your list of outgoings and finding ways to reduce them.
For each item, consider:
- Could you pay less?
- Could you buy it less often?
- Can you cut it out completely?
There are lots of ways to pay less, even for essentials, including shopping around, looking for discounts and offers, changing brands or suppliers, or paying bills annually rather than monthly.
You can even save on your debts if you can transfer them to get a lower interest rate (this shouldn’t be the norm as you can divert your energy to creating and building wealth). You should now be able to create a new budget and spending plan for the future.
Put your essential costs down first, such as rent or mortgage repayments, interest and minimum debt repayments, food and utilities.
You can think of this as your budget, showing you what you have to cover before you can do anything else.
Next, add on the non-essential fun items, such as going to the cinema or eating out. You can think of this as your spending plan, or how much you get to spend.
Don’t be too strict with yourself as you want to create a spending plan you can really stick to, and remember to leave yourself a little extra for the unexpected.
If you’ve managed to find some savings, there should still be some money left over. Use this to achieve your goal. Make further debt repayments, put it into an interest-earning savings account, start paying into a pension or start investing your money.
5. How to Stick to Your Spending Plan
Making a plan is always easier than keeping it, but a good budget should allow you to cover your essentials and have some money to enjoy spending too.
You do need to be careful and watch what you’re spending though. Record everything you spend in a notebook, spreadsheet, app or online spending planner and check how well it matches your plan.
- Don’t feel like you have to spend all your budget every month. You can always save any extra or use it when you have a more expensive month.
- If you overspend, deduct it from next month or use the money you set aside for unexpected extras. It is important to review your budget if it keeps happening as you might need to change it.
- Make it as hard as possible to overspend by moving money into a savings account and getting rid of unnecessary credit cards.
- Know what makes you overspend and avoid it. If you’re more careful online, buy things this way. If you spend less when you’re handing over cash, use it rather than your card.
Keep track of your progress towards the goal you set too, as this can help you stay motivated.
Once you’ve achieved your goal, or if something in your life changes, don’t forget to change your budget too.
Here are 5 things you can do to put this into action:
- Work out your out goings so you know where your hard earned cash is going.
- Set yourself a financial goal that will motivate you to take action.
- Create a spending plan.
- When you are tempted to give up, think and envision yourself achieving your goal.
- Tell someone about your budget and/or your financial goal.
Telling someone about your budget or goal can also help you to stick to it, so why not share what you’re cutting back on or tell us what you’re saving for?
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