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Planning a budget

How to plan an effective budget

By Joe Elvin

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How to plan an effective budget

Get your finances under control with our six-step guide to creating a manageable household budget.

A household budget is a plan that summarises your earnings and spending habits, so you have a clear idea of where your cash is going.  

Provided you stick to it, a budget plan will help you keep on top of your spending, and make sure you don’t fritter away more than you earn.  

If you have a financial goal – such as getting out of debt, saving for a mortgage deposit or putting money away for your retirement – it will help you work towards this too.

Here, we explain how to draw up a household budget that accurately reflects your income and expenses.

Find out more: 50 ways to save money - our comprehensive money-saving guide 

How to create an effective household budget plan 

1Get organised and take your time

Set aside at least an hour before you begin planning a home budget. Doing it in a rush is likely to mean you make mistakes.

It's a good idea to gather all the paperwork you’ll need before getting started, so get hold of:

  • a few months' worth of bank statements
  • your recent credit card bills
  • copies of your household bills
  • details of your savings and pension contributions
  • information on any other incomes you may have.

(In the example below, our budgeter is paid a monthly salary. If your main income arrives more frequently, you may prefer to make a weekly or fortnightly budget.)

2Add up your income

  Previous three months  
REGULAR INCOME Jan Feb Mar Average
Salary £2,294 £2,294 £2,294 £2,294
Rental income £450 £450 £450 £450
Savings interest £55 £58 £61 £58
Freelance income £150 £50 £200 £133
TOTAL £2,949 £2,852 £3,005 £2,935

Jot down your regular earnings from employment (after tax, student loan payments, pension contributions etc. have been deducted), then add other sources of income, from savings, investments, self-employment, rent payments etc.  

Calculate what you earned in the last three months and note down the average, so you have a rough idea what you might expect to earn in the coming months.   

Now might also be a good time to ensure you’re paying the correct amount of tax. For help with this, see our guides on tax codes and tax for the self-employed

3Calculate your essential spending

  Previous three months  
REGULAR INCOME Jan Feb Mar Average
Salary £2,294 £2,294 £2,294 £2,294
Rental income £450 £450 £450 £450
Savings interest £55 £58 £61 £58
Freelance income £150 £50 £200 £133
TOTAL £2,949 £2,852 £3,005 £2,935
 
ESSENTIAL SPENDING Jan Feb Mar Average
Mortgage payments £780 £780 £780 £780
Utility Bills £299 £278 £303 £293
Groceries £500 £410 £510 £473
Car £200 £180 £170 £183
Gym £85 £85 £85 £85
Childcare £450 £410 £450 £437
MONEY SPENT: £2,314 £2,143 £2,298 £2,252
MONEY LEFT FOR DISPOSABLE INCOME: £635 £709 £707 £683

Next, jot down how much of your money monthly income goes towards essential spending.

Categorise these payments, so you have a good idea of where your cash is going. Your categories could include mortgage payments, utility bills, groceries, childcare, travel etc.

Gather your bank statements, household bills and credit card bills for this task. The more accurate your figures are, the more useful your budget will be.

Calculate your total expenditure for each of the last three months – and subtract this from your monthly earnings. This will show you how much is typically left for ‘non-essential’ spending each month.

4Review your disposable income

  Previous three months  
REGULAR INCOME Jan Feb Mar Average
Salary £2,294 £2,294 £2,294 £2,294
Rental income £450 £450 £450 £450
Savings interest £55 £58 £61 £58
Freelance income £150 £50 £200 £133
TOTAL £2,949 £2,852 £3,005 £2,935
 
ESSENTIAL SPENDING Jan Feb Mar Average
Mortgage payments £780 £780 £780 £780
Utility Bills £299 £278 £303 £293
Groceries £500 £410 £510 £473
Car £200 £180 £170 £183
Gym £85 £85 £85 £85
Childcare £450 £410 £450 £437
MONEY SPENT: £2,314 £2,143 £2,298 £2,252
MONEY LEFT FOR DISPOSABLE INCOME: £635 £709 £707 £683
 
DISPOSABLE INCOME SPENDING Jan Feb Mar Average
Cigarettes £60 £55 £80 £65
Alcohol £65 £90 £54 £70
Football £90 £110 £45 £82
Going out/leisure £195 £150 £210 £185
Savings £200 £200 £200 £200
Other £124 £95 £99 £106
 
DISPOSABLE INCOME SPENT: £734 £700 £688 £707
MONTHLY BALANCE: -£99 +£9 +£19 -£24

An accurate review of how you’ve previously spent your disposable income will prevent you from under or over-budgeting in certain areas.  

Note how you’ve spent your disposable income in the previous three months. If you put money into savings, note down how much money you store away each month too.     

At this point, you may discover you’re regularly spending more than you earn. If this is the case, making a budget is a crucial task that shouldn’t be put off. 

Our guides on balancing your household budget and getting out of debt could prove useful in this scenario.

5Draw up a budget you can stick to

  Previous three months     Next month
REGULAR INCOME Jan Feb Mar Average     Apr
Salary £2,294 £2,294 £2,294 £2,294   +£0 £2,294
Rental income £450 £450 £450 £450   +£0 £450
Savings interest £55 £58 £61 £58   +£0 £58
Freelance income £150 £50 £200 £133   +£0 £133
TOTAL £2,949 £2,852 £3,005 £2,935     £2,935
 
ESSENTIAL SPENDING Jan Feb Mar Average     Apr
Mortgage payments £780 £780 £780 £780   +£0 £780
Utility Bills £299 £278 £303 £293   +£0 £293
Groceries £500 £410 £510 £473   +£0 £473
Car £200 £180 £170 £183   +£55 £238
Gym £85 £85 £85 £85   +£0 £85
Childcare £450 £410 £450 £437   +£0 £437
MONEY SPENT: £2,314 £2,143 £2,298 £2,252     £2,307
MONEY LEFT FOR DISPOSABLE INCOME: £635 £709 £707 £683     £628
 
DISPOSABLE INCOME SPENDING Jan Feb Mar Average     Apr
Cigarettes £60 £55 £80 £65   -£15 £50
Alcohol £65 £90 £54 £70   -£15 £55
Football £90 £110 £45 £82   -£15 £67
Going out/leisure £195 £150 £210 £185   -£70 £115
Savings £200 £200 £200 £200   +£50 £250
Other £124 £95 £99 £106   -£15 £91
 
DISPOSABLE INCOME SPENT: £734 £700 £688 £707     £627
MONTHLY BALANCE: -£99 +£9 +£19 -£24     +£1

With an accurate picture of your average spending now at your fingertips, it should be easy to draw up a monthly budget you can stick to.  

Use your average earnings and compulsory spending figures for the last three months to estimate how much disposable income you’ll have in future months, adding in any one-off payments you know are on the way. 

From there, you can set a reasonable budget for your disposable income, along with achievable savings targets.    

In the example above, our budgeter has planned to put an extra £50 into savings in April, simply by budgeting £15 less a month than average in each other category of his disposable spending.

He’s also budgeted an extra £55 for his car’s MOT by removing an extra £55 (£70 total) from his ‘going out/leisure’ fund for that month.  

Find out more: managing your budget – four expert tips

6Keep an eye on your spending and roll with the punches

Once you’ve drawn up your budget, it’s important to keep an eye on how faithfully you’re sticking to it and adjust your limits accordingly.

We’d recommend revisiting your budget each month. This way, if you’re continuously overspending, you’ll notice quickly and will be able to readjust before it affects your financial goals too drastically.  

A lot of people find it simpler to manage their budget using spreadsheets or personal finance software. Check our personal finance software reviews to see what these programs could do for you.

  • Last updated: April 2017    
  • Updated by: Joe Elvin

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