How to Budget Your Finances

Not keeping track of your spending, saving and borrowing habits can lead to unfortunate consequences. You may end up with debts you cannot pay back or not have sufficient funds for necessary purchases like car repairs or a new boiler. Being aware of how much you spend and save is an important factor, but long term financial good health requires long-term planning. Budgeting for the future, whether it’s weeks, months or years, can give you a sense of confidence and control over your financial situation.

Budgeting – Where to Start

The first step when it comes to budgeting is to gather as much information about your financial situation as possible. Payslips, P60s, credit card statements, bank statements, pension statements, receipts, bills, direct debits or student loan statements. This information is important, because you’re not just looking at your current financial situation - when you budget you are using past spending to try and predict what will you spend in the future.

You’ll then need somewhere to enter all this information – you can stick with good old fashioned pencil and paper, create a spreadsheet using Excel or Google Docs or use a handy online budget planner. You may also want to speak to family, friends or your place of work to get information on any changes to income or expenditure that you had not considered.

Income vs. Expenditure

Start by adding together any income streams – salary, interest on savings or investments, freelance or self-employed work or money from the government like child benefit or tax rebates. If you want to get even more granular you can include things like reward schemes – for example if you regularly get vouchers from your supermarket.

You should also do the same for your spending, this can be harder as purchases may be more unpredictable or harder to track down. It is important not just to include large, regular spending like rent, utility bills and food, but also those one-off purchases like a new pair of shoes or tyres for your car. Naturally, it’s impossible to predict exactly how much you’ll spend on unexpected purchases, but looking back should give you a good estimate.

It’s best to look at your income and expenditure over a long period – the more information you have, the better your prediction of future spending will be. Once you’ve subtracted your total spending from your total income, you’ll be able to see if you’re spending too much or if you have money left over. 

Changing Your Budget

If you find your expenditure is predicted to be larger than your income, then you’ll need to start planning some changes. It may be possible to increase your income, either by doing extra hours or looking for a higher salary, but you may need to cut back on spending. If you find you spend a lot on ‘luxury’ purchases, it might be easier to cut back, but if you’re mainly spending on essentials, you may have to be more creative. 

You could use comparison sites to help reduce your phone or energy bills, look at switching supermarkets for a cheaper shop or if you are paying off debts, you could consider restructuring or a balance transfer. 

If you are fortunate enough to have money left over each month, it’s still very useful to budget as you can plan the best way to make the most of your money through savings or investments. If you have debts, it’s better to pay these off first to avoid extra spending on interest.

Budgeting for the Future

The great thing about having a budget is that as the months pass you can compare what you predicted to what you actually spent. Keeping track of income and spending as the months go by, will make it a lot easier to update your budget as you go. Although a budget is a useful tool, the most important thing is trying to stick to it – it’s easy to throw plans out when the unexpected happens, but discipline is an important part of financial management.

There are different tips and techniques out there for planning and sticking to a budget. One popular method is the 50-20-30 method – as described in this article. This technique suggests budgeting 50% of your income for living costs and essentials like utilities and food; 20% for financial goals like paying off debt or growing your savings and 30% on optional purchases like holidays and entertainment. The 50-20-30 breakdown may not suit every budget, but can help simplify how you view your finances and make it easier to take action.

Money Saving Expert also recommend a ‘Piggybanking’ Technique – which involves setting up different accounts for different types of spending and creating standing orders to store money in each of them. The idea is to make it easier to stick to your budget by apportioning money in a way that gives you a realistic view of what you have available to spend.

If you are interested in learning more about your finances, you can get online access to your credit history with the FREE Equifax Credit Report & Score product which is free for 30 days and £14.95 a month thereafter.