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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.

In this article
1. Get organised and take your time 2. Add up your income 3. Calculate your essential spending
4. Review your disposable income 5. Draw up a budget you can stick to 6. Keep an eye on your spending and roll with the punches

For all the algebra, history and geography, there’s a life skill that you might not have learned at school: planning a budget.

Without a household budget, you’re simply spending blind, unaware of where exactly your money’s going. It might work for you for a while, but if you hit a financial hurdle, or you want to make the money you have go further, planning a budget is a must. 

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's our six-step plan that you can follow to create a comprehensive budget. And when you're done, head over to our page on balancing and managing your budget for tips on how to stick to it. 

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

 

1. Get organised and take your time

Set aside at least an hour to create your budget. Rushing it could lead to 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.

2. Add up your income

Here’s our example of the ‘income’ section of a budget. We’ve included multiple forms of income just to show how that would work, but you may well just need to include your monthly salary here (which would be much easier).

  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 of 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

3. Calculate your essential spending

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.

  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 (DISPOSABLE INCOME): £635 £709 £707 £683

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 which will form your disposable income.

4. Review your disposable income

Next, it's time to add a layer which analyses how you spend your disposable income.

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.     

  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 (DISPOSABLE INCOME): £635 £709 £707 £683
 
DISPOSABLE INCOME SPENDING Jan Feb Mar Average
TV subscription £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

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 how to manage your budget successfully and tips on paying off your debts could prove useful in this scenario.

5. Draw up a budget you can stick to

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.    

  Previous three months     Next month
REGULAR INCOME Jan Feb Mar Average   Adjustments 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
TV subscription £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

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 their disposable spending.

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

Find out more: managing your budget successfully

6. Keep 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.

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