Create a budget in 7 simple steps

Why is it important to budget?

A budget helps towards building on financial stability and security, and more than ever, individuals are looking to track their expenses.

Key Takeaways

• Being accountable for your expenses will help you make positive changes

• Preparation will help you plan a better future

• A budget builds security and safety around your finances

 But why is it important to have a personal budget? With the rising energy bills, inflation, the cost of living and Christmas all on the horizon, even the most efficient budgeters may begin to panic. It is no surprise that following a plan and keeping an eye on your finances is important, but what happens if something sabotages it as it invariably does?

Budgets are important for that reason. They allow you to be prepared for the worst, so you can spend your money in the best feasible way.

How to create a financial budget

In my experience, most people begin by saving a little money here and there, keeping a rough idea of costs in their heads. Whilst it’s great to have an awareness of what you are spending this method is hard to manage. In the same token, I rarely see people take the plunge, do a full budget, and check it at the end of the month.

Step 1: Start by writing everything down

Whether you are a lover of a spreadsheet, an electronic notebook or a good old-fashioned pen and paper – they are all effective when it comes to budgeting. By writing everything down, it is harder for costs to slip through the cracks and go unnoticed.

For an entire month, write down everything that you spend money on. To ensure your list covers everything, remember to ask for receipts, and include cash spends too.

Do not forget to include your direct debits and standing orders, household bills and leisure activities too. At the end of each day, when you jot down your expenditure, circle anything that was not necessary.

Please note, I do require a coffee to function in a morning but spending £4.00 a day in Costa is technically a luxury. So, be honest with yourself.

Creating of an extensive list of expenses will be a real eye opener for some and in turn, will cause individuals to naturally curb unnecessary costs. Others will continue as normal but the more consistent you are at taking notes of your costs, the better.

Step 2: Split spends into categories

Once you have compiled an entire month’s spending, split each item into columns. Essentials and non-essentials. For a budget to be a success, honesty really is the best policy. The essentials should only include things necessary to live e.g., utilities, mortgage/rent, basic food items and fixed bills.

The rest of the items are therefore non-essentials, but always sense check each column. Those that know me well will confirm that I enjoy a glass (or two) of wine. I usually buy wine with my food shop, but at risk of sounding like a raging alcoholic, if I cut this off my monthly food bill the figures would look significantly different.

Whatever your poison be it wine, beer, chocolate biscuits or cleaning products a realistic budget needs to separate this.

Whilst this process will give you a guide on what you are spending money on, most people complete this exercise to save money or repay debt.

Step 3: Plan for the unknown

A budget can easily lose its way if you do not prepare for changes. If for example, you are currently paying your mortgage on a fixed rate that is due to end in three months, it is worth factoring in a potential increase to the payments. Petrol can also be variable depending on the trips you have planned each month, so it is important to plan in contingency.

Once you have calculated all your monthly expenditure there are couple of methods you can chose from. At various stages of my life, I have tried both for different reasons.

1. Set aside money for each week

Some individuals will calculate exactly what they need to cover all essential bills and direct debits, and then withdraw the remaining cash. You could spend the balance over several weeks in the month. If you find you are spending week three’s money in week one, the chances are you are slipping into unhealthy habits and need to refocus.

2. Pay yourself pocket money

My preferred method, and one I still use today, is to have two bank accounts. Salary goes into the first bank account, where bills and savings will come out of. I also break my annual expenses down for insurances and then pay myself “spending money” into the second bank account. This is the only card I carry and spend from, and there is no danger of not being able to afford a bill that comes in.

Whichever method you select, its vital that you only pay yourself only what you can afford. Using one bank account for everything can muddy the waters if you forget a direct debit later in the month. It is also worth noting that I pay myself only after I set money aside for savings. Most people we talk to start the month with the intention to save this money, but the danger with this method is not having anything left to save.

Step 4: Be kind and check in on yourself

There is no need to cut out all non-essential items, at the end of the day, it is your hard-earned money, and you deserve to spend it. As a rough guide, when splitting up your budget, try the 50, 30, 20 rule. Fifty percent of your salary should be on essentials, 30% of your salary can be for your ‘wants’, and the remaining 20% is for saving or repaying debt.

Once you have created a budget plan, one of the toughest challenges will be sticking to it. I am often my own worst enemy when it comes to a budget, and it is amazing how easily I can justify just one little item as essential when it is something I really want.

If like me and sticking to a budget is a challenge, I would strongly recommend continuing to monitor your daily spending and checking in with your plan at the end of the month.

Set a reminder daily and as well as the end of the month – it will make you accountable for what you are spending.

Step 5: Set yourself goals

Whether you are saving for something specific, like a holiday or a car, or just wanting to pay off debts, it is a goal is a great incentive to budget. Again, write down what you want to pay off in three months time, or have reached in savings, so that you can monitor your progress and remain accountable to yourself.

Over the years I have helped people on how to budget to save money, whether that be to manage debts or help build a dream retirement. Whichever stage you are at, most find the homework unpleasant and the process tedious, but in all honesty, most people thank me at the end of it.

Achieving your financial goals is not always easy or pleasant but having someone (be it yourself or a financial advisor) to keep you accountable will help the process.

Step 6: Lead us not into temptation

One of the toughest challenges when learning how to stick to a budget, are temptations. Unfortunately, in this modern age, they appear everywhere. In previous blogs, we have touched on lifestyle creep and ways to spend less at Christmas, all of which apply when it comes to sticking to a budget but alongside these deleting shopping apps from your phone or tablet can also help.

Programmes like “Eat Well for Less” always have fine examples of couples that have no perception of what they are spending on food, whether they prefer branded items or enjoy a takeaway, extras that can run food shops into the hundreds.

Having a weekly meal plan and only buying what is on your list, will help control what you are spending – and even eating! Supermarkets will often show you the “offers” first, but they are not always as good as they seem. You can end up with a store cupboard filled to the rafters and long since forgotten, so if it is not on the list do not buy it. Hard as that is, you will thank me at the end of the month!

Step 7: Do not tease yourself with treats

Shops, adverts, and social media are also all designed to persuade you that what they are selling is essential and with so many options at our fingertips, and just one click away from next day delivery, it is tough to retrain your brain to resist. But it is possible. We cannot remove temptations, entirely but if you want to stick to a budget, add a special item to your shopping basket and leave it there for 30 days.

If you still want it at the end of the month and can afford it with left overspends or spends from next month, then buy it. If not, then remove it and move on.

Living on a budget can be exceptionally rewarding as you feel the sense of accomplishment when you achieve your goal, but the process can feel less fun. Do not be too hard on yourself as it can be counter productive as it is far easier to fall off the wagon if the budget is too tight. Treats do not have to cost the earth, but they will make it easier to get to pay day and one step closer to your goal.

The bottom line

Budgeting for you may be the easy part, but the toughest fight we will always have been with ourselves. I have talked about retraining your brain and learning how to create and stick to a budget is all about recognising these behaviours. Whether that be yours, or your family’s, as I know it can be tough to say no to my nephew when he is hell bent on wanting something.

You do not have to budget on your own. Educating your family on budgeting, talking to them about your goals, and explain to your child that by not having the magazine now, means you will be able to have a holiday next year.

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