How to build a budget

There are many different money-saving hacks available online. These tricks are fun, but learning how to build a budget is one of the best ways to save money and take charge of your finances.

So, if you’ve got questions surrounding how to budget your money and why budgeting is important, we’re here to help. We’ve created a guide filled with all the best budgeting tips to get you started.

What is a budget?

Budgeting for beginners can seem tricky, with many people finding the idea of sitting in front of spreadsheets, lists and receipts a little daunting. But at its core, budgeting is simply a plan of your finances, designed to help you stay on track and meet your goals.

For instance, say you want to go on holiday this summer, but you know you’ll need to cut down on spending to achieve your savings target. All you’ll need to do is write down your expenses (for the amount of time you have between paychecks) to help you see an outline of where you spend the most, and where you can cut back.

Since effective budgets are highly personalised, you’re the best person to make your monthly budget. It needs to be tailored to your lifestyle, spending habits, and income streams.

Why is a budget important?

Budgeting is crucial for making sure that you don’t live and spend outside of your means. It helps you to keep track of all your outgoings, ensuring that you don’t end up in debt to cover essential payments.

It can help you to avoid having to resort to credit cards or loans, and it’s one of the best ways to give yourself financial security.

How to set a budget

1. Take a look at your current finances

If you’re wondering how to manage a budget, a good place to start is by taking a look at your current spending habits. Take a week to write down everything you purchase and identify where you spend most of your money.

Perhaps your daily Starbucks is adding £20 to your weekly food spending? If so, it might be time to cut back on the things that are draining your wallet.

2. Choose a budgeting framework

Many people choose to follow the 50-30-20 rule when building their budget. This involves putting:

• 50% of your income towards your needs, such as rent, utility bills, and food shopping
• 30% towards wants, including subscriptions and entertainment
• 20% towards saving for things like emergency funds, education, and retirement

You can adjust these percentages to suit your unique needs. For instance, you may need to spend more on necessities and put less into your savings.

If you’re looking for a budget planner template to help, our budgeting made simple guide can provide a handy checklist and budgeting tool to help you start your budgeting journey.

Also, some apps can help you record your payments quickly and easily – and they can even illustrate where your money is going through handy infographics. Some of the best budgeting apps out there include:

• Monefy
• Wally
• Emma
• Moneyboard
• Fudget
• Plum
• Snoop

Creating your first budget

Setting up a budget for the first time can be challenging, as it requires you to predict your spending habits. As a result, many first budgets are too abstract or ambitious to succeed.

Give yourself some leeway by building a budget that reflects your current habits. Deciding these numbers and putting them on paper will help keep you on track.

Setting up a budget: Four essential steps

1. Save money where you can

A good place to start when creating a budget is by making meaningful savings on your bills. So, start by looking at the amount you spend on utilities, media, and servicing debt each month.

There are some incredibly useful tools out there to help you get a better deal on your gas, water, and electricity. For instance, a good tip is to sign up for a service such as Energy Monitor, by Moneysupermarket.com.

It’s also worth reviewing the streaming services and channels you subscribe to and considering whether you need every single one. Read our guide to finding and cancelling subscriptions you don’t use to learn more.

Finally, one of the main debts we often have to service each month is our mortgage repayments. This is the largest monthly outgoing that most of us have and, for anyone who isn’t signed up to a fixed contract, it should be the first place you try to make savings. If you can move to a different mortgage provider, or if your home has increased in value since you bought it, you could be looking at savings worth several hundred pounds each month.

2. Be realistic

Creating a realistic budget will allow you to save money without restricting yourself. All too often, new budgeters resolve to spend less without a real plan to cut expenses. Making a tangible budget means writing everything out, and knowing how much you can spend on transportation, groceries, and evenings out.

For example, if you are currently saving £100 a month, it is unrealistic to try to increase your savings to £2,000 in the coming month. If you buy a takeaway five nights a week, consider where you might be able to save money on food and groceries. For example, try to save £200 this month, or reduce your takeaway meals to twice a week. By making a realistic budget, you can stay motivated and start to save more cash.

3. Include ‘fun money’

Although it’s tempting to try to drastically reduce ‘unnecessary’ spending when creating a budget, you do need to allocate money for things that you may view as frivolous, such as clothes, holidays, leisure activities and eating out.

If you don’t allocate a budget to these expenses, you may end up spending money on these things anyway – which could max out your budget.

4. Remember to account for annual expenses

There are some significant expenses that we all have to meet at certain times of the year. These aren’t monthly expenses like rent and utility bills, but costs that only really come out of our banks once or twice a year such as:

• Holiday costs
• Christmas and birthdays
• Annual subscriptions

Although these aren’t payable each month, it’s a good idea to allocate funds to them monthly so that money is available to pay for them when they arise.

If you’re wondering how to budget better, it’s also a good idea to create an ‘other’ category, for items that don’t fall neatly into other regular categories.

Moneyboat’s top budgeting tips

If you’re seeking more tips on how to budget, or you’re wondering how to build a budget that works for you, here are some handy insights:

1. Write it out

Visual cues are great tools to help you make your payments on time and see your budget.

Use a traditional paper or online calendar to write down when each of your monthly payments is due. This will help you avoid missing a payment and being forced to pay a late fee or overdraft.

2. Track payment dates

Track the due dates of even your automated payments to make sure you have sufficient funds in your account when your payments are processed. In addition to writing out your payment calendar, writing a budget can be very helpful. Experts recommend using Excel or Google Sheets to enter and compare data easily.

3. Categorise your spending

Divide your expense categories in ways that are meaningful to you. If you’re living with your parents expense-free, take utilities and rent off the list for instance.

Your budget is meant to reflect your current lifestyle, and it can change as aspects of your life evolve. So, we’d recommend revisiting and adjusting your budget about three times a year to keep an eye on things.

4. Keep it up to date

Did you generate a new source of income, or incur an unexpected expense? You can account for this by frequently assessing your budget. Just because your income increases doesn’t always mean you need to start spending more! Keeping a budget will help keep you on track.

5. Be honest with yourself

After assessing your expenses, take the time to ask yourself qualitative questions about how you can spend your money wisely. Asking questions will help you make a more accurate budget for next month and remind you where you can save more money. Here are some examples:

• Which purchases last month were truly investments? Will the knife set I bought help me cook at home more, or was it an unnecessary upgrade from what I had before?
• What things can you cut out of your budget this month? Do I need to go out for after-work drinks every Friday? Can I suggest an alternative activity?
• What is one way I can bring in more income in the coming month? Can I tutor my neighbour’s children to make some extra cash?

How can I save on my monthly expenses?

Trimming down your outgoings may allow you to save some money each month, helping you plan for challenging financial times in the future. Here are a few quick ideas:

Phone plans

Full data plans are expensive, and more people are opting to switch to cheaper pay-as-you-use plans or limiting the amount of data each month.

Gym membership

Why pay for a membership that you’re not using to its fullest? Consider purchasing some home gym equipment, using free online exercise classes, or just going for regular runs and walks. Investing in home equipment may cost you more initially but will certainly save you money in the long run – if you’ll forgive the pun.

Declutter your home

Decluttering is a liberating experience. Consider selling items at a car boot sale. Or, for pricier objects, consider listing them on eBay or Etsy! 

Hopefully, our guide on how to budget better has inspired you to take charge of your finances. Instead of stressing about your spending, consult your budget and feel good about spending on the occasional night out! Most importantly, make your budget work for you.

Looking for additional insights? We’ve got plenty over on the Moneyboat blog. There you can dive into money-saving tips such as how to make your money last until payday and how to create long-term financial goals.