HOW TO SET AN EFFECTIVE BUDGET
As far as I am concerned, budgeting is truly the foundation of good money management. As the saying goes, you cannot manage what you don’t measure.
The reality is, without a budget your money can very quickly take control of you instead of you taking control of your money. I see budgeting as telling my money exactly where to go and what to do - I call the shots around here!
So, if you’re wondering how to effectively set up a budget that you can spend 20 minutes doing once a month, then this is the article for you! I will talk about what should be included in your budget on a big-picture level, but of course everyone’s circumstances differ so you will have to tailor it to be personal to you.
You can do this on pen and paper, or you can create an excel spreadsheet. If you cannot be bothered to create a budget then I have one available for £2.40 on Etsy linked here, so feel free to grab that if it’ll make your life easier. So, let’s get into it!
Step 1: The Goals
Keep in mind that a budget is designed to be a guide on how and where you spend your money and there will be times you spend more or less than you have budgeted for. It will be helpful at this stage to have your bank statements to see what you’re currently spending on average.
The key to budgeting is finding a balance between what you currently spend and what you desire to spend. There of course are some non-negotiables such as how much you pay towards your mortgage/rent, but there could be some wiggle room in how much you spend on food or subscriptions, for instance.
Before you start, set a judgement-free zone and remember to be REALISTIC! Effective budgeting is a marathon not a sprint and you need to give yourself some grace before you can stick to your budget bang-on.
Step 2: Calculate your monthly income after taxes and deductions
When you get paid each month, what do you see hit your account? That’s the number you need for this. How much you make before taxes, pension contributions or student loans is irrelevant because that is not money you receive. If you are doing a household budget, then you would put all of the relevant incomes.
Step 3: Housing & Utilities
This will be budget category 1. In this category you should include your monthly mortgage/rent payments, your utility costs such as gas, electric and water, council tax bill, broadband package, and any other miscellaneous recurring costs for your house.
As a nice rule of thumb, your mortgage and rent should make up no more than 30% of your net income. This is a good goal to work towards if you're not there, and if you are there, it's nice to work towards getting that percentage down as low as possible.
Step 4: Groceries/Food
I separate this from housing costs because I think it’s useful to see how much is spent on food because this category can easily get out-of-hand. In this category include how much you spend on your food shop in a month, how much is spent on takeaways, work lunches, and of course any trips to Starbucks or Costa.
Step 5: Debt repayments
We’ve got to get rid of those pesky debts! Unfortunately, the vast majority of people will need this budget category so let’s just tackle it. In this category include the monthly payments you make towards credit cards, any loans such as personal or car loans, or any other repayments you need to make such as buy now, pay later schemes.
And remember, the goal is to get rid of these debts so try to stretch beyond the minimum payments if possible.
Step 6: Investment & Savings
I strongly believe this should be a monthly habit that everyone should develop, whether that is saving £10 per month or £1,000 per month. It’s not about the amount of money you’re saving and investing, it’s about making it become a non-negotiable that every month you should pay your future self. So do allocate a portion of your monthly budget for this.
Step 7: Transport
This category includes any money you spend to get to and from places for work or leisure. If you have a car, then include how much you spend on fuel. If you take the train, then include the public transport costs. In this category, you could also consider including how much you spend on your car upkeep, such as MOT, servicing your car and road tax.
Step 8: Giving & Donating
If you are a giver, you should have a category for this. If you're not a giver, you should become one. It is GOOD for the soul! Whether you give to charity, a religious organization or support a family or friend in some way, it’s important to include this in your budget.
Step 9: Insurances
I like to think that people are insuring themselves sufficiently in case of an emergency so this is deserving of a budget category. Include any life insurance, home and contents insurance, car insurance, mobile insurance, or travel insurance. You may not have all of these so just pick the ones relevant to you.
Step 10: Miscellaneous
There may be a better name for this category, but I haven’t figured it out yet. This category is for your fun money and other bits which tend to get a portion of your money each month. As far as I am concerned, you MUST include some money to enjoy yourself someway or somehow.
Whether that’s going to the cinema, going out to eat, getting your nails done, or attending a concert, whatever it is, give yourself some guilt-free money that you can enjoy yourself with. I also include my mobile phone in this category, subscriptions such as Amazon and Netflix, gym membership costs, and self-care. If money was really tight these are areas I could cut back on, so I like to keep it under miscellaneous.
Step 11: Life Events Fund
I know this is far down the list but this has become one of my favourite budget categories because it is so useful. I speak about how I effectively do this using Monzo pots in this YouTube video linked here.
Essentially, I suggest budgeting money every month towards life events such as birthdays, holidays, weddings or Christmas. So you will have to work backwards for this. How much money do you intend to spend on these events over a year. If you plan on spending £300 for gifts at Christmas, you would need to save £25 per month to achieve this. Honestly, it will make these events so much less stressful when you already have a pot of money set aside for this. I truly highly recommend this approach!
Step 12: Other Things
There’s always things that come up which you weren’t expecting. So it doesn’t hurt to budget a little money for things that may come up. Also, I use this category for things that are one-offs and don’t occur on a monthly basis. An example of this may be buying a piece of furniture for the house. I know I need a new sofa, so I can include that in my budget temporarily until I have saved enough for the sofa.
And with that I have come to the end of this post! I hope budgeting will become a pleasant way of life for you and that you have found these steps useful.
30-year old living in the UK who is actively working towards achieving Financial Independence (FI). Sharing all the tips and tricks I am learning along the way!