How to budget your money

The first step to getting in control of your finances is to create a budget. This will help you understand what your income is, and what you’re spending your money on each month.

Let’s take a look at what budgeting is and go through a step-by-step guide to making a budget.

how to budget

What is a budget?

A budget is an itemised summary of your income and expenses for a given period. It helps you plan your spending, manage your money and set financial goals.

Whether it’s scribbled in a notepad or put into a spreadsheet, budgeting is an important life skill.

Lots of people struggle financially because they don’t plan their spending, or know what their income is. Planning how to use your money may help you:

  • Avoid getting into debt (or help you getting out of debt)
  • Plan for big one-off expenses
  • Spot potential money-saving opportunities

How do I make a budget?

1. Get your financial information together

sorting through bills

You’ll need to gather together all of your financial information including:

  • Your regular household bills (water, gas, electricity, phone, internet)
  • Your living costs (food, toiletries, prescriptions, clothing)
  • Any insurance policies you have (home insurance, pet cover)
  • Your travel expenses (car costs, bus fares)
  • Your leisure costs (gym membership, cinema trips)
  • Any debts you have (loans, credit cards)

Don’t worry if you don’t have these figures to hand. You can check your online banking or online utility accounts to see what you spend.

If you don’t have these set up yet register for them, and keep your login details safe.

2. Calculate your income

Your income is the money you receive each month from any work you do, as well as from benefits, pensions, investments, or money from partners or relatives.

If you’re self-employed, base your budget on the net amount you can draw from business. This is the amount left after all taxes and business costs are paid. If you need help working this out, contact Business Debtline.

If your income fluctuates, you might want to read our guide to budgeting on a fluctuating income.

3. Calculate your regular spending

Look at what you spend every month in each of the following categories:

  • Housing costs
  • Household bills and services
  • Court payments
  • Travel costs
  • Housekeeping, including food, cleaning, pet costs and clothing
  • Children/family
  • Leisure and entertainment
  • Health and personal care
  • Debt repayments
  • Other essential living costs

This free budgeting sheet will help you with this.

Top tip: If you are spending a lot of money every month on debt repayments you may need debt advice. Use our Debt Remedy tool to get online debt help now.

4. Don’t forget to budget for one-off expenses

M.O.T.One of the aims of creating a budget is to plan your spending thoroughly. Do you need to pay for a large one-off expense later in the year such as a car MOT, or a repair to your home? Make sure you add this to your budget.

You can do this by taking the amount you’ll need for the one-off expense, then dividing it by 12 and adding it your monthly budget. You then put this amount aside every month. Putting it in a savings account away from your day-to-day bank account can help you avoid dipping into it.

5. Check if you have a ‘surplus’ or ‘deficit’ budget

Once you have added together your monthly income, and taken away your outgoings – have you got money left over?

If you do, this is called a ‘surplus’. You should use this to pay towards any debts you might have, or add this to a savings account. If your surplus is small then we’d recommend getting debt advice now.

However, if you’re spending more than your total income each month you have what’s called a ‘deficit’ budget.

Spending more than you have coming in means that you’re at risk of getting into financial difficulties, especially if you’re using credit to pay for everyday living costs, or are dipping into your overdraft on a regular basis.

You may want to consider revisiting your budget to see if you can cut back in any areas. You should seriously consider getting debt advice – using overdrafts and credit cards in this way is a danger sign of debt.

6. Set up a savings account

piggy bank

If your budget allows, you should set up one or more savings accounts so that you can start putting money aside each month.

It’s a good idea to set up one for larger, planned one-off purchases, and another for creating an ‘emergency fund’. It can be tempting to dip into your savings, so a handy way of avoiding this is to get a savings account with a different bank, building society or credit union that isn’t linked to your current account.

Having some ‘rainy day’ savings can help you avoid getting into debt if you have an income shock such as redundancy or illness. In fact, in a recent report we revealed that over half of the people we asked told us that emergency costs they had to pay could have been covered with savings of £300.

Find out how to start an emergency fund by reading our guide.

7. Track your spending

It can be helpful to carry a small diary to keep track of your spending. It’s easy to forget small purchases, but they soon add up!

There are budgeting apps which we’ve tried and tested that may help you to keep track of your spending. Or you could track your spending for one month to see where your money goes.

Top tip: You should also get into the habit of checking your online banking regularly.

Tracking your spending helps you understand where your money goes, but it can also affect how you spend your money too. Writing down every penny you spend may make you less likely to splurge on something you don’t need.

8. Use cash not card


It’s very easy to lose track of your spending if you’re using your debit card, and especially if you’re using contactless payments.

Try to withdraw cash for purchases rather than using your debit card. And only use your credit card for purchases when you know you can repay them in full when the statement comes through.

9. Look for ways to save

In almost every budget there may be opportunities to save a little more money. Ask yourself if you could:

  • Move to a cheaper phone/text/data tariff?
  • Switch to a cheaper TV package?
  • Save money on your insurance by comparing deals next time it’s up for renewal?

Making these reductions could free up valuable extra money to help you keep on top of your household bills or boost your savings.

Many people don’t actually want to leave their providers, and would happily stay if they were offered a good deal.

IsMyBillFair can tell you in 60 seconds if you’re being overcharged by your provider. If you are, you’ll be given the tools to challenge the provider and get them to reduce your bill.

Usave have a guide on how to compare broadband deals. Checking regularly for a better deal elsewhere can help you save a fair bit of money over time.

10. Review your budget regularly

Once you’ve started to budget effectively you should review your spending regularly. There’s no set time to do this, but it’s worth checking every few months.

During your review you should check if:

  • Your income’s increased or decreased
  • If there are items you no longer need in your budget
  • If any of your costs have increased or decreased
  • If any of your benefits entitlements have changed
  • Your budget matches what you’re actually spending (and this is why the spending diary is so handy)
  • If you’ve planned to build up any savings or pay off any debts, are you on target

Now you understand the basics, set aside a couple of hours, make a cup of tea and get started on your budget. There are a number of online resources available to help.

Free budgeting tools:

  • The Money Advice Service offers an online budgeting tool which can help you make a budget and analyse your spending
  • have an online budget calculator called ‘Budget Brain’ which takes about an hour to complete
  • Citizens Advice also offer a step-by-step budgeting guide which helps you create a printable budget plan
  • You could also use our Debt Remedy tool to create a budget and get debt advice

Posted by in Budgeting