Now, I’ll let you into a little secret. I am a total geek. I love excel, budgets, trackers and pretty much anything to do with organising. If there is something I can set up a template for, hell yeah I’m setting it up (and I’ll make it as pink as poss too!).
If you’ve never put a budget together, it can be a pretty daunting task. There are a few moving parts to a budget and various budgeting methods out there which you can adopt.
I’m here to make the process a little easier by taking you through the different budgeting methods, along with a step by step on how to create a budget from scratch.
What is a budget?
A budget, in simple terms, is an estimation of income and expenses, usually over a given period of time – a month or a year for example. It gives you the ability to visualise your money in vs your money out, which in turn, will enable you to see where you’re able to cut costs where not needed and thereby achieve your goals quicker.
Having a budget is vital to making your money work for you. It will help you to keep on track of paying your monthly bills and debt repayments (if you have any), which decreases the risk of you running into money problems down the line.
Budgets are also extremely important if you have any financial goals – unless you love the stress of living paycheck to paycheck?! By creating a budget, you’ll be able to see how much disposable income (income less expenses) you have leftover each month, which can then be pumped into a savings pot.
Your budget should not be designed so that it feels too restrictive and leave you with no money to enjoy yourself; but instead viewed simply as a tool to manage how you spend your money.
Budgeting methods
There are a few budgeting methods out there which can sometimes make it confusing on where to even begin. I’ve outlined the basic principles of some of these below to help aid your decision.
Ultimately though, I can’t tell you which budgeting method you should absolutely use as this is a personal choice and it’s whatever works for you at the end of the day, visually and practically.
Traditional
The traditional method is the easiest starting point (in my opinion) for any beginner looking to set up their very first budget. There is no funky calculations or logic behind it, it is straight forward to understand and so simple to implement. And for that reason, it is also the method I still use to this very day!
Here you will:
- Start with your total income earned
- Deduct your expenditure
Any cash you have leftover can then be put into a savings account or used to pay off debt, should you have any.
The 50/30/20 method
The 50/30/20 budgeting method is the preferred option for many finance gurus and bloggers. The idea is that you split your budget into three sections:
- Needs – 50%
- Wants – 30%
- Savings – 20%
I can totally see the logic behind this budgeting method as it will help you to approximate how much you should be spending in each of the areas every month. You don’t have to delve into every cost line by line, like you do in the traditional method, as you’re simply using the percentages as a guide – this can save you heaps of time.
Personally, this method doesn’t work for me, for a few reasons (but that’s not to say it won’t work for you!). I spend way less than 50% of my wage on bills (needs) and I also think 30% is very generous for ‘wants’. I mean, I love treating myself as much as the next person, but I think I’d struggle splashing 30% of my wage on them.
‘Pay yourself first’
The pay yourself first method works almost in the same as the traditional method, except it’s in reverse order.
Firstly, you start off by calculating how much you wish to save. E.g. if you wish to save £5k in one year, you will need to save £416.67 each month.
Once you’re paid, you would then transfer the £416.67 into a savings account, before you do anything else. This ensures you will reach a desired goal.
You are then free to spend the rest of your money on whatever you like! Safe in the knowledge that your savings have already been taken care of.
Which do I prefer?
In my experience, half of the journey is realising where your money actually goes. Because if you don’t know where your money is being spent how do you know if you’re overspending? If you don’t know where your money is being spent, how do you know how much you’re able to save?
Being able to dive into each line of your budget and having an understanding of what the numbers mean and how you’re able to influence them is key, in my eyes.
For those reasons (and what I’ve already alluded to), my personal fave is the traditional method.
Using the traditional method of budgeting, I’ll now show you how to set up your budget in three easy steps.
Steps to creating a budget
Step one: Calculate your Income
If you earn an annual salary and your income doesn’t vary month on month, this step should be fairly easy. Take a look on previous bank statements or payslips and grab the net pay figure to slot into your budget.
If your pay is dictated by commissions or perhaps you run your own business, your monthly income is likely to vary.
As a starting point, I would recommend you calculate your prior 12 months worth of income. Inflate or deflate this figure by a % you think your income may grow/shrink by in the next 12 months. Divide this figure by 12 to get a monthly average.
In your budget, make sure to include any extra income you may be expecting such as money from a side hustle or part-time job etc.
Step two: Deduct Expenses
This is the section which will take you longest to complete and is arguably the most important section as it’s most likely where you’ll learn a touch about yourself!
It’s completely up to you how you lay this out, but I like to lay mine out in order of when the payments are due (commencing after my pay day). This way, I know at any one time where I’m up to and what is still left to debit my account. You may wish to categorise your expenses by type: Home, Utilities, Entertainment etc. – whatever works best for you.
Include absolutely everything you can think of – from your rental/mortgage repayments to how much you pay for a hair/nail appointment. It’s probably beneficial for you to refer back to prior bank statements in order to help you remember not only who you pay and for what service, but for how much too.
Step three: What’s left?
After deducting your expenses from your income, you will hopefully be left with a balance. This balance, depending on your personal goals, can then be used to start building a savings kitty or repaying more of your debt.
I call this section my ‘pots‘. I have a savings pot, emergency funds pot, birthdays pot and the list goes on… Creating pots is the perfect way to protect yourself from being blind sided by an unexpected bill or that one birthday you always seem to forget about. Set the money aside little and often and odds are you won’t even notice it, but will certainly make ‘future you’ breathe a sigh of relief when it arises.
Now, obviously you aren’t physically spending this cash so you may wish to open up an additional bank account to home these pots. This will also limit the temptation to spend the money as it won’t be sat in your normal current account anymore.
For your savings pot, an ISA, LISA or something similar will be most appropriate. Although interest rates are pretty dismal at the moment, you will still benefit somewhat by depositing your money into these.
For your other pots, a normal current account would do the trick, I would just recommend you to keep some sort of tracker of your monthly deposits so you can remain organised. Another option would be to open a Monzo (or similar) account. Monzo allows you to create multiple pots which act like separate accounts but are in fact still all under one umbrella account.
And that, is how you create a budget, in a nutshell.
My budget style is zero-based, so I start from scratch each and every month – a blank slate. This way, if I perhaps have a bad month and I’ve overspent treating myself on Asos, I can draw a line under it and start afresh.
Keeping on top of your budget and reviewing it periodically is a MUST. If you don’t update it as and when expenses debit your account, the data may become outdated (if the amounts differ to what you budgeted), in which case it will become obsolete.
Finding what works well for you is also key. In this step by step, I have shown you how to set a traditional budget up, but if you gave it a go and found it didn’t work well, give one of the other methods a go.
Happy budgeting!
Leave a Reply