How to create a budget

Does the word ‘budget’ fill you with dread? 

Unfortunately, budgets often get a bad reputation as they can be seen as boring; a system that sucks the fun out of life, and something that should only be considered as a last resort.   

But creating a budget can give you more control over your money and help you make informed financial decisions that could leave you with more to spend on the things that make you happy! When times get tough, and situations change, a working budget will help you navigate the uncertainty and provide peace of mind for the future. 

Here are our top tips on how to create a budget that suits you: 

Calculate your incomings and outgoings 

1. The first part of creating a budget is the most painful. This is when you’ll need to sit down with your bank statement and a calculator and get stuck in
   
2. You’ll need to start by working out exactly how much money you have coming in each month and how much you spend

3. For incomings start with your salary. If your pay varies every month, try to choose an average month to work from, rather than basing your budget on your best or worst. Next, think about any other regular income you may have such as tax credits. 
   
4. Now for the outgoings. It might take a little more time, but you need to go through your statements to find out exactly how much you spend on your rent or mortgage, household bills, car costs, insurance, and any other regular expenses.

This can be a tough process – especially when it exposes those hidden costs you hadn’t even noticed – but once you’ve got it all written down, you can get to work on creating a realistic and workable budget.

When you add everything up, the total amount of your incomings should be higher than your outgoings to avoid going into debt. 

Divide costs into fixed or variable 

Now that you’ve done the groundwork, it’s time to find out where you can start saving. Even if your incomings are greater than your outgoings, you still might want to cut costs to boost your savings and top up your emergency fund. 

Start by dividing your costs into fixed and variable.  

Fixed costs are the ones that you must pay and can’t easily control. These can include your rent or mortgage payment, commuting costs, and energy bills (you could also look at switching to a cheaper tariff!) 

Variable costs are easier to cut down. These might include your morning coffee, clothes shopping, holidays, or your food shops. Try not to be too hard on yourself. It will be tough to stick to a budget when you have cut all the little luxuries that make you smile. So instead, think about rationing such treats to every now and then (for example: takeaway coffee once or twice a week, rather than every day.) 

Start a savings pot 

In uncertain times, savings become even more important. Of course, savings are a luxury and if your budget doesn’t allow for it right now, don’t beat yourself up. However, if you can cut some of your variable costs and have some money left over, saving is almost always a good idea. Aim for a 50/30/20 split – spend 50% of your income on your needs and 30% on things you want, then invest 20% straight into your savings. 

It’s best to start your savings off by creating an emergency fund. Ideally, this should cover three to six months of expenses if you were to unfortunately lose your income or see a dramatic decrease due to unforeseen circumstances. If you can, try to keep this fund full and avoid dipping into it to cover unnecessary costs. 

Another great tip for saving is to set up different accounts or pots. You can have one for large purchases like a car deposit, one for holidays and another to cover Christmas. This will help to keep your savings separate, understandable, and stop you from dipping into emergency funds. You can then work out how much you can afford towards each of the goals and set up standing orders each month. 

Smart savings technology 

A great way to aid saving, especially as a new saver, is to download a savings app that can connect to your online banking, eliminating the hard work (and paperwork) for you.  

Free budget calculators like Emma, PocketGuard or MINT can help you to categorise your incoming and outgoing expenses, plus create savings pots that automatically save money each month. Other budgeting apps can share savings pots across multiple accounts so you and your partner can save together. 

Be flexible 

A common misconception is that budgets must be fixed, but we all know that life isn’t like that. Some months everything runs smoothly and in others your boiler can breakdown at the same time your final holiday payment is due. And if you have a job that means your income varies, you could find that your budget looks very different from month to month.  

If you’re able to build savings, then these will be able to help in slower months. You could decide to reduce your standing orders as times get tough and increase them once things pick up again. The same goes for flexible earnings; it’s a good idea to save more in months where you’ve earned more to help carry you through harder times, just like the unforeseen pandemic.  

Make your budget work for you, don’t let it control you.