How to budget your money
If you don’t know how to budget or want to learn more about it, Latest Deals is here to help you. Learning how to budget your money is the first step to financial freedom because you will know how to make your money work for you. We have lots of tips and tricks to get your budget together.
What is a budget?
A budget is a plan for your income and your expenses for a period of time. You can have a weekly budget, a monthly budget or an annual budget, for example.
In this guide, we will focus on a monthly budget, but you can apply the same ideas to a weekly or annual budget.
When you know how much money you are bringing in and how much money you are spending, you can make better decisions such as where to allocate your money according to your priorities.
No matter how much money you make, you need a budget. If you are on a low income, this will allow you to bring more value into your life, because you will be making the most of every penny spent.
If you are on a higher income, this will allow you to use your money to bring even more wealth into your life, without the extra work, with passive income, for example.
Why do you need a budget?
You need a budget:
- if you want to find more ways to save money
- if you want to reduce overspending
- if you want to take control of your finances
- if you want your spending to reflect your goals and values
- if you want to break the paycheck-to-paycheck cycle
- if you want to get out of debt
- if you want to avoid making new debts
- if you want to build an Emergency Fund
- if you want to start saving for retirement or any long-term financial goals.
What is the most important thing to do in a budget?
The most important thing to do in a budget is to track your current spending habits. This shows how you are using your money and opportunities to save.
To know what your spending habits are you need to track them for at least three months. Get your bank statements from the previous three months and start checking everything you spent money on.
How do I make a budget?
We have a step by step guide on how to make a budget:
1. Gather all your financial information
To start your budget, you need to know:
- Your income (the money you receive after taxes or any other deductions, such as pension payments)
- Your regular expenses (rent, mortgage, household bills, insurance, personal bills such as your phone contract, gym membership, and monthly subscriptions)
- Your living costs (food, transport, healthcare, childcare)
- Your variable expenses (shopping, going out and others)
You can calculate these by checking your bank statements.
Your regular expenses are payments that are often the same. You need to list everything that is leaving your account every month.
Then, you need to list your living costs. How much do you spend on food? How much do you spend on transport? How much do you spend on healthcare? How much do you spend on childcare? All these things need to be on your budget.
Then, finally, you need to list your variable expenses which are the things that you spend money on after your bills and your living costs, like shopping and others.
IMPORTANT NOTE: Every budget is going to be different because every person is different. The best way to start it is by going through your bank statements and placing all money out into a category.
If you have never done that before, you need to do it for the last three months to have an idea of how much money you are spending. Also, you might have different categories, such as school, car, pet and others depending on your lifestyle.
Don’t forget to add your debts
If you have debts and you are planning to pay them, you need to include them in your budget.
It can be overwhelming to have to pay for credit cards and loans, and if you are having trouble, there are free debt advice charities available, one of them is Step Change.
You can always renegotiate your debts and pay in monthly instalments to make it easier for you, then they will be considered as a monthly bill as well.
Tools to Help
There are free tools which can analyse your spending and do this for you. Latest Deals’ favourite tool is Yolt. It is a free app which connects to your bank (officially, and fully regulated by the Financial Conduct Authority) and automatically shows you your spending via category. For example: bills, shopping, travel, and memberships.
2. Analyse your spending and define your savings goal
Now you analyse the data you have gathered by reviewing your bank statements. In which category are you spending more money than you should? You might be surprised by the numbers.
Check if you are spending more money than you are making, if this is your case you might end up in debt. Rule number one in personal finance is to spend less than you make.
There is always an expense we can cut or get for cheaper. Use Latest Deals for deals that will help you save more money.
Now it’s also time to decide how much money you want to start saving because this is going to define how much money you can spend.
If you are making £2,000 per month, and you want to save £500 every month, you can only spend £1,500.
If you don’t have a savings goal, you will probably spend more money. Having a fixed number in your mind will help you to achieve it month by month.
IMPORTANT NOTE: If you are living paycheck to paycheck, it can feel hard to save, but it’s not impossible. You don’t need to start saving much. It's more important to start the habit of saving money than how much money you are saving.
You can try cutting some costs, making more money, or looking for what type of benefits you can get if you are on a low income. There is always a solution.
What to do when there is NO leftover money on your budget
It’s sad when there is NO leftover money on your budget. That means that you are either spending too much money or that you are not making enough money to afford your lifestyle. To resolve this you can do two things:
- Spend less money
If there is no money left, you will need to check all your expenses and try to reduce them. You can start with your fixed house expenses. Call your internet, TV, water, gas, electricity providers and see if you can get a better deal to reduce your bills. Then, you move to your other fixed expenses, such as your car, insurance, and subscriptions. If you can live without your car, maybe it’s time to say goodbye. Insurance is hard because it seems like a waste of money until you need it.
If you are in an extreme situation and do not have enough money for basic items such as food, look for food banks near you. You can also reach out to a Citizens Advice Bureau for free guidance and help.
- Make more money
Now that you are spending less money, it’s time to make more money as well.
If you are unemployed:
- The UK Government website has a jobs portal with over 100,000 jobs available
- You can find your nearest JobCentre Plus
If you are employed, some ideas:
- Negotiate a pay rise
- Look for a new, better paid job
- Google has a very good Jobs website which shows you average salaries. Here is an example for Construction Jobs in Hampshire.
- Ask for additional responsibilities and more hours
- Look for a second job, perhaps at the weekend or evenings
- Earn a side-income online (read our full guide with 20+ tips)
- Get help with the UK government
There are many benefits you can get from the UK government if you are of a low income.
Read our full guide about all the benefits you can get in the UK.
3. Set up a savings account
If your budget allows you to save, you need to set up a savings account.
Ideally, every person should have an Emergency Fund, which is three to twelve months of their monthly income or the total of their monthly expenses saved.
This will vary from person to person because what makes you feel financially secure is personal, that’s why it is called personal finances because it’s only meant to work for you and your life.
Some people prefer to have three months of monthly income saved, others twelve months of monthly expenses saved.
For example, if someone makes £2,000 per month, and spends £1,500 in monthly expenses, this will result in an Emergency Fund of £6,000 to £18,000 depending on how much this person chooses to save.
You should have on your Emergency Fund whatever makes you feel financially comfortable.
This may sound impossible if you are living from paycheck to paycheck. Start small - even just 1p - and strengthen the habit of saving.
You can also set up more than one savings account. You will need one for an Emergency Fund, one for your future (understand more how pensions work in the UK), and one for the things you want to be able to afford, like a house, a trip or even a gadget, for example.
If you want to save for a house, we recommend checking the Lifetime ISA savings account. For a trip or a gadget, for example, you can use a normal savings account with your bank.
4. Track your spending daily
Check your budget daily to make sure you’re on track. You must have the habit of checking your bank account every day to know how much money is coming in and out.
For that, you can use your online banking account or your bank app on your mobile phone.
- Track your money using a spreadsheet
- Withdraw your daily spending budget as cash so you can see what’s left
- Create a daily savings goal with a physical savings jar
- Leave your credit card at home
IMPORTANT NOTE: There are many templates for budgeting spreadsheets, but we recommend creating your own, as you can edit it as you like it. You can create a basic one on Excel and start adding more features with time. The more you use it, the clearer it will be to notice what type of information and features you need on your spreadsheet.
5. Review your budget regularly
Our lives are constantly changing and so are our budgets.
If something has changed in your life, it’s time to sit down with your spreadsheet and analyse how you can adapt.
If you are making more money, you can start saving more, for example. If you are making less money, you will need to say goodbye to some expenses, for example.
Also check for things that might have gotten more expensive and look for a cheaper alternative, like a cheaper broadband, for example.
The important thing is to make your budget work for you.
15 General Budgeting Tips
- If you receive commissions or have an unstable income, make sure you are ALWAYS saving more when you receive more money to compensate for when you don’t receive it or receive less.
- Separate the money for your bills and your living cost first, and later for the variable spending.
- If you can, avoid using credit cards and pay for your daily purchases in full. Keep it restricted to bigger purchases that can be more advantageous to pay in instalments. (Read: How to choose the best 0% purchase credit cards)
- Always adjust your budget to your current situation. When things change around your life, it’s time to sit and make adjustments to your budget. Your budget needs to work for you and make your life easier.
- It’s okay to spend money on things that are not essential to your life but give you pleasure. The problem is to spend more money on them than you can afford. Create a budget for that.
- Understand what your priority in life is and have a clear goal. It will help you spend money wisely. If your priority is to save, and you know how much you want to save, it will be easier to manage your money to make this happen. Managing money is a daily exercise, the more you practice, the better you get.
- Get into the habit of paying yourself first, this means as soon as you receive your salary you allocate the money into your savings before you start spending it and have nothing left to save.
- Every time you are going to spend money, you can think how many hours you need to work to afford that, then you can see if something it’s worth or not your money. You can find out your hourly salary here.
- Make sure you are also budgeting from Christmas or other gift-giving holidays, birthdays, annual car inspections and registrations, annual vacations, annual medical exams, including veterinary exams and others. These expenses can catch you by surprise, so it’s better to think about them ahead of time.
- Understand what is luxury and necessity in your life. Eating is a necessity, eating out and ordering in are luxuries. Cooking your own meals will help you save a lot of money. Read some of our guides about saving money on food:
- 40 ways to save money on food bills
- How to save money at Morrisons
- How to save money at Aldi
- How to save money at Lidl
- How to save money at ASDA
- How to save money at Tesco
- Avoid making a budget that’s hard to stick to, because this will only lead you to frustration. Saving can be challenging, but it takes time to get used to different lifestyles, so be patient.
- Always base your budget on your income after taxes and deductions, even more, if you are self-employed or have investments.
- If you want to buy something that you don’t actually need, give yourself time. Also, check how much value you are going to get from that purchase and if the benefits are worth the cost.
- If you want to have a credit card, stick to one that has a lower limit, this way you won’t be able to spend much.
- If you really need to take control over your finances, you can try a no-spending challenge, you can do it for a couple of days, a week, a month or even a year. There are many tips about how to do it online.
How to identify your financial goals?
The main reason to have a budget is to achieve your financial goals. To make it easier for you to stick to your budget, you need to have a clear understanding of what are your financial goals. Some of the most common financial goals are:
- Saving for retirement
- Building an emergency fund
- Buying a house
- Purchasing a car in cash
- Paying off debt
- Saving for college/university
- Saving for a vacation or other big purchases
If you know what your financial goals are and when you want to achieve them, you know how much money you need to save monthly to get there, for example.
The earlier you start saving, the faster you will achieve them.
Also, if you are focusing on more than one goal at a time, it can be harder to achieve any of them.
Ideally, you would first focus on building an emergency fund, because then you have a safety net if anything happens to your income.
Then, if you have debts, you can start paying off debt and after you can focus on saving for retirement, buying a house or purchasing a car, for example.
The most important thing is to understand what is a priority for you and what do you want to achieve first to feel comfortable financially.
Steps to Financial Freedom
Having a budget is the most important step to financial freedom, but there are many others:
1. Start an Emergency Fund
If you want to avoid future financial problems, an Emergency Fund is essential.
If you lose your job or have a big unexpected expense, you will be fine, because you will be able to afford it with your Emergency Fund.
2. Save for retirement
Another important step to financial freedom is to start saving for retirement.
If you are paying for National Insurance, you are entitled to receive State Pension. You can also contribute to your workplace pension and a private pension.
3. Pay off and avoid new debts
We know it’s easier said than done, but if you have a budget that works for you, it will be much easier to pay off and avoid new debts.
IMPORTANT NOTE: Clare Seal is a good example of how to pay your debts and to avoid getting more debts. She wrote a book teaching how you can do the same. Read about her interview with The Guardian here.