Last updated in October 2020
Do you know how to make a budget? Apparently, one-quarter of British adults do not as they reportedly do not have any savings. Moreover, one in ten adults admits they regularly spend more than they earn.
Without any savings, you are in danger of entering a vicious cycle of debt as soon as anything unforeseen happens. This could be something as simple and common as your car breaking down or an illness. The consequences of this are disastrous, yet easy to prevent.
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Why do I need a budget?
A budget is a tool that allows you to build up savings and avoid or pay off debt. At the end of your budget period, you look at your accounts to see whether you have adhered to your set limits. Simply by doing this, you will become more aware of your money and probably spend less.
Why do I need savings?
You may be living paycheck-to-paycheck every month and feel completely fine. And it is true that if you spend as much as you earn, you do not accumulate any debt. Yet, having no savings equals future debt. It means you are owing money to your future self.
Other than for emergencies, savings are important for other reasons:
- To pay for important life events
- To reduce money worries and money-related anxiety
Why your debt is an emergency
Many people are too relaxed about their debt. It is not uncommon to have one or two credit cards that are not paid of or a new gadget bought on finance. People seem to think they are fine just because they can afford the monthly minimum payment.
In reality, you need to pay off your debt as soon as you can, if possible today. This is because you are paying interest on your debt AND you are missing out on making interest on the money that you owe.
How to make a budget
Making a budget is a fairly simple process. All you need to know to make a budget is your income and your regular expenses. My free and interactive Never Be Broke Again workbook can help you with this.
There are two methods to assess your expenses:
For this approach, you simply make a list of what you think you will spend for the upcoming budget period (week/month) by category. This method will only work well for those who already know roughly what they spend each month.
First, look at your bank statements to find out what your expenses are. If you pay mostly in cash, simply spend a month collecting receipts of every purchase you made (or write down what you bought). To make this easier, you can break down your expenses into categories such as:
- Debt repayment
- Phone bill
- Subscription services e.g. Netflix
- Gym membership
- Beauty and hygiene products
- Eating out
- Payments towards a sinking fund
If you are unsure what your categories should be, start as narrow as possible and then broaden your categories. For example, you may start with a category for beverages, but over time find out that you do not actually spend that much on drinks. Therefore, it would seem sensible to combine beverages with food.
Having categories will make it easier for you to find out where to save, even if you are on a tight budget.
How to make a budget out of this
Once you know how you are spending your money each month, you can set a limit for each of the categories you made. For example, if you have a category for petrol and in the last budget period you have spent £40 on petrol, you can set your general limit to £40. You may have to adjust this limit for a month in which you plan to drive more than normal or if petrol prices increase.
Have a positive budget
To bring your budget together, subtract your expenses from your income. Your number may be positive, negative or zero. If your number is positive, you can put the remaining money into a savings account. I recommend doing this at the start of every month so you are not tempted to waste this money.
If you are currently spending as much as you earn or more than you earn, you can either increase your income or reduce your expenses until your result is positive. Look at each category and decide whether you can reduce costs.
Other methods to create a budget
Prioritising savings (top to bottom)
There are other ways to create a budget. For example, you can look at your income first and then deduct the amount you intend to save and use the rest for your monthly expenses (top to bottom).
This method is often recommended as it prioritises your savings over your expenses. Savings are super important, but having food to eat and a roof above your head is even more important.
Percentage-based budgeting rules
You may have heard about the 50/30/20 rule that recommends spending 50% of your post-tax income on essentials, 30% on things you want and save 20%. There is also a general rule of thumb of spending no more than 30% on housing, and many other percentage-based budget approaches.
However, this guidance may not be appliable to you. Everyone’s position is a unique situation e.g. country, city/town, material status, number of dependents, medical conditions, etc.
Secondly, assuming you can waste 30% of your income because you have already covered your needs and saved 20%, is dangerous. Rather, you should aim to save as much as possible (without depriving yourself). This is especially true if you have no emergency savings or are aiming for financial independence.
How to be a successful budgeter
If you are not good with money, you may fail on your first try. Budgeting is a skill and you will get better over time.
The key message of this is that failing is part of the process and you will get better as you continue. Everyone can be a budget god but nobody is one from the start.
How to make a budget Excel budget tracker
To help you out, I have created an Excel budget tracker. You can download it for FREE from Monethalia’s Resources section. To get access, simply pop your details in the form below. You also sign-up to my free newsletter (unsubscribe any time).
How to make a budget summary
Having a budget is important to build up savings or avoid debt. While making a budget may be a daunting task, it is less daunting than accumulating debt or living with financial worries. A budget will also help you to save a portion of your salary every month.
To make a budget, find out what your expenses are and categorise them. Going forward, you can set yourself limits on how much to spend per category. Always ensure you are spending less than you earn and do not worry if you fail a few times.
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