How to create a budget

Keeping track of your incomings and outgoings is important, especially when times get tough. If you’ve decided now’s the time to tackle your money, check out our quick guide to how to create a budget

Written by Verity Hogan
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Does the word budget fill you with dread?

Unfortunately, budgets often get a bad rep. They’re 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. And when times get tough and situations change, a working budget could 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 works for you:

Calculate your incomings and outgoings

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. You’ll need to start by working out exactly how much money you have coming in each month and how much you spend.

For incomings, start with your salary. If your pay is different 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. When you add everything up, the total amount of your incomings should be higher than your outgoings to avoid going into debt.

Now for the outgoings. It might take a little more time, but you need to go through your statements to find our exactly how much you spend on your rent or mortgage, household bills, car payment, 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.

Divide costs into fixed or variable

Now 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 might still 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 have to pay and can’t easily control. They might include your rent or mortgage payment, your commuting costs, and your energy bills (although you could look at switching to a cheaper tariff!)

Variable costs are easier to cut down. These might include your morning takeaway coffee, Saturday nights out, clothes shopping, weekend trips, or your weekly food shop. Try not to be too hard on yourself. It’s tough to stick to a budget when you’ve cut all the little luxuries that make you smile. Instead, think about rationing your coffee to once or twice a week or make those big nights out a fortnightly rather than weekly event.

Start savings pots

In uncertain times, savings become even more important. Of course, having savings is 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. You might even want to aim for the 50/30/20 split – spending 50% of your income on your needs, 30% on things you want, and 20% going straight into savings.

Your savings priority should be building up an emergency fund. Ideally, this should be enough to cover three to six months of expenses if you were to lose your job or reduce your hours and your income were to suddenly change. If you can, keep this fund full and try to avoid dipping into it to cover other costs.

Another top tip for saving is to set up different accounts or pots. You might want to have one for large purchases like a new fridge or a car deposit, one for holidays, and another to cover Christmas, for example. Work out how much you can afford to save towards each of your saving goals and set up standing orders so the money transfers automatically each month.

Be flexible

A common misconception is that budgets need to be fixed. 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’ve been able to build savings, then these can help in the slower months. You could decide to stop your standing orders when times get tougher and then increase them again when things pick up.

The same goes for flexible earnings; it makes sense to save more on the months where you’ve earned a lot of commission as it’ll help carry you through quiet times. Make your budget work for you, don’t let it control you.

Verity Hogan

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