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How To Budget

Budgeting can be simple. A lot of people are worried about getting the maths wrong, or feel like they haven't got the time - but it actually shouldn't take much time or effort at all, once you know how.

How to put together your own budget

You can create your own budget in three very simple steps.

1. Work out your take-home earnings

This might sound simple, but be careful. You'll need to look at how much you actually earn after tax and other deductions (in other words, the money that enters your account each month).

Also remember to include things like benefits and tax credits - it all counts.

2. Work out your total monthly outgoings

Make a list of all the things you regularly spend money on. This should include both essentials (mortgage/rent, bills, etc.) and non-essentials (TV subscriptions, gym memberships, etc.). Put down a generous estimate for costs that vary - money spent on food, for example.

It might help to look through a few recent bank statements, to make sure you've remembered everything.

Now add up the total - giving you your total monthly outgoings.

3. Work out your 'spare' money

To work out how much you can safely spend or save without impacting on your quality of life or running the risk that you won't be able to afford your essential bills, deduct your total monthly outgoings from your take-home earnings.

If your income and expenditure are pretty much the same every month, you'll only need to do this once.

A simple example budget

Take-home earnings
Monthly salary
Child benefit
TOTAL
1,200
150
1,350

Monthly outgoings
Rent
Energy bills
Council Tax
Food & household essentials
Mobile phone
Water
Home insurance
Car insurance
Petrol
TOTAL
500
90
120
200
20
20
18
52
100
1,120
1,350 (earnings) - 1,120 (outgoings) = 230 spending money

Of course, this is just a simple example, and everyone's financial situation will vary.

Note: If you ever find that your outgoings exceed your income, meaning you can't afford all your commitments, seek financial advice immediately.

If you can see that you have a number of debts that are taking up a large portion of your income every month, you could potentially reduce your monthly payments by consolidating your debts. This basically involves taking out a new loan to pay off existing debts, and then repaying the loan over a longer period of time (thereby making each monthly payment smaller).

Why is budgeting important?

Helps to prevent overspending

The main idea of a budget is that it helps you to live within your means. By working out exactly how much you need to cover your costs, you can make sure you're not falling behind on anything important. What's more, you know the money left over can be spent (or saved) on anything you like.

Helps you to spot problems

Seeing all your income and outgoings written down will help you to spot areas for improvement. For example, you might notice that your energy bills are taking up a large amount of your income (in which case you could think about switching). Or you might see that you're spending more on non-essentials every month than you should be. By budgeting carefully, you'll have much more control over your finances.

Helps you set goals

If you've got a clear idea of the state your finances are in, it'll be much easier to plan for the future. For example, if you know you have 400 a month to spare after dealing with your costs, you might decide to start putting half of that into savings.