How to create a budget

Budgeting is the first crucial step toward financial wellness. Creating a budget will help you understand what you’ve got coming in each month and where it goes. It will help you prioritise your spending and identify where you could make savings.

Whether you’re struggling to cover your bills each month, or just want to save a little extra cash, building a strong budget and following it can benefit everyone - no matter what your situation is.

Getting started

Open our budget planner

Back in the day, budgeting generally involved a pen and paper and lots of scribbling out. Hopefully, our budget planner should make your life a bit easier when it comes to getting your finances in order.

Set aside some time

We won’t lie to you, creating your budget can be a bit of a faff. But it’s well worth it – and once you’ve done it then it’s much easier and quicker to keep it up to date. Set aside an hour or two and start by getting some paperwork together. You’ll want some recent bank statements (or just log in online), recent payslips and benefit awards. If you can find them, dig out other recent bills too like gas, electricity, water, car insurance, home insurance and so on.

Be honest with yourself

A budget isn’t about what you’d like your income and spending to be – it's about what it actually is now. So write down what you actually spend and, if anything, err on the side of overstating your spending!

Work out where your cash goes

If you withdraw cash to spend, then you might want to understand where that goes too. Keep a spending diary for a week or two: jot down all the cash you use in a notebook or on your phone and add that into your budget.

Incomings and outgoings

The first thing to do when creating a budget is to identify how much money you have coming in. This can include anything from a salary to benefit payments, pensions or child maintenance.

Once you’ve calculated your net income, then move on to your outgoings, such as mortgage/ rent, utility bills, car finance, debt payments, phone bill, childcare costs and so on.

Small, irregular payments can be easy to ignore. Whether it’s a television subscription or morning coffees, seemingly insignificant purchases can amount to a lot. Taking note of these expenses can help you create a holistic picture of what you really spend each month and how to manage it. Once you’ve done this, add it to your total outgoings and move to the next step.

Don’t forget occasional costs

One of the biggest budgeting pitfalls is to forget the costs that only come up from time to time. This could include birthday and Christmas presents (and other costs), and other one-off spends. We’d suggest splitting the cost of these across 12 months to make sure that you allow for them in your budget. For this to work, you’ll need to put that money aside each month though.

What’s your magic number?

Once you’ve completed your budget you can work out your ‘magic number’ – that’s your income minus your outgoings. There are three possible outcomes:

Your income is higher than your outgoings

This is the best possible result. If you aren’t already, you should certainly start saving. Remember, it can still be worth reviewing what you spend to see if you can create more money to save each month.

Your income is equal to your outgoings

Again a good result - now’s the time to review your spending to see if you can trim your outgoings to free up some money to start saving.

Your income is lower than your outgoings

Unfortunately, you can’t go on like this without borrowing money and digging yourself into a deeper financial hole. It's time to take urgent action to review your spending and make some changes. The first place to start is categorising your outgoings and marking which are priority bills/spending and which aren't.

Keep your budget updated

Well done for getting this far.

Budgeting isn’t a one-off exercise though, it is an ongoing discipline. For example, if your council tax comes through and it's gone up £10 a month, be sure to update your budget.

You may need to find savings elsewhere to keep your budget balanced. Similarly, if you switch to a cheaper home insurance provider and save £20 a month, then update your budget and try and save the money you’ve freed up.