How to plan an effective budget Planning your budget: a step-by-step guide

Use a computer to help budgeting

Use your financial records to ensure your budget accurately matches your spending 

A home budget is a spending plan that takes into account your monthly income and expenditure, so you have a clear idea of where your cash is going.  

If you have a financial goal – such as ridding yourself of debt, saving for a deposit on your first home or putting money aside for your retirement – a budget plan will help you work towards this.

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

What’s a budget and why do I need one?

Provided you stick to it, a budget will help you to keep on top of your outgoings, and make sure you don’t spend more than you earn each month.

It’s important to revisit your budget plan on a regular basis – particularly if your employment or living situation changes – or you could find it no longer works for you.

If you make sure your budget reflects your everyday expenses and income as closely as possible, you’ll be more likely to follow it.

Find out more: balancing your budget - six tips to ensure your outgoings don't exceed your earnings 

1. Get 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 together 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

2. Add up your income

Next, you need to calculate your income. Make a list of your regular earnings from employment (after tax and National Insurance has been deducted), as well as any income you have from savings, investments, self-employment or rent from any properties you own.

Make sure you don’t focus only on monthly incomes. Add any weekly, yearly or sporadic earnings, such as dividends from shares, as well. 

Whether you’re using a spreadsheet, a notebook or a specially designed computer programme to create your budget, make sure you separate your annual/irregular and monthly earnings into two or more columns. Once you’ve done this, calculate overall totals for each income ‘stream’, as well as a ‘yearly earnings’ figure.

Now might also be a good time to ensure you’re paying the correct amount of tax. For help with this, see the Which? tax codes explained advice guide and other useful articles in our tax section.

3. Work out how much you’re spending

Now you need to work out how much you’re spending each month. Look at your bank statements, household bills and credit card bills to ensure you have a realistic idea of where your cash is going – and avoid guessing wherever possible. The more accurate your figures are, the more useful your budget will be.

Remember to account for occasional spending, not just monthly expenditures. Think about the cost of Christmas, birthdays, insurance policies, your MOT and your annual holiday. Add costs like these into your list of expenses – ideally in a separate ‘yearly/occasional outgoings’ column.

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

Once you’re sure you’ve included everything you need to, add up your monthly and occasional spending separately so you end up with two totals.

Next, calculate an overall figure that incorporates all your yearly expenditure. If you divide this number by 12 and look at the difference between your result and your ‘regular spending’ total, you’ll see how much money you need to earmark each month for ‘irregular’ spending on things like car insurance and gifts.

4. Compare what’s coming in and going out

Now it’s time to look at your income and spending totals alongside one another.

Subtract your annual and monthly expenditure totals from your annual and monthly income figures. You'll be left with the yearly and monthly surpluses – or shortfalls – in your finances. A shortfall will be indicated by a negative number.

Even if you find you have more money coming in than going out, it’s still a good idea to draw up a budget plan. This will allow you to ensure you keep spending sensibly, and could help you find extra opportunities to save for the future or pay off debts more quickly.

Meanwhile, if you discover you’re spending more than you earn at the moment, making a budget is a crucial task you shouldn’t put off. If you fail to address the situation, you could drift into debt - and ultimately find yourself in a downward financial spiral that's difficult to escape.

Find out more: how to deal with debt - this guide offers useful tips for anyone worried about what they owe

5. Draw up a budget you can stick to

Whatever your financial goals, now is the time to draw up a plan that will help you achieve them.

Be as realistic as possible when budget planning. It should consist of what you intend to spend each month, and in some cases each year, on key things. However, there will always be certain costs that are impossible or very difficult to cut. 

Small changes, such as not buying a takeaway coffee every day, could make a big difference to your budget over the long-term.

Changes such as switching your current account, credit card or energy provider could also help to balance your budget without the need for cutbacks. You can find more ideas like these in our 50 ways to save money guide.

Once you’ve drawn up your budget, it’s important to keep an eye on how faithfully you’re sticking to it – particularly in the first few months.

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Last updated:

March 2016

Updated by:

Joe Elvin

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.