I know the thought of creating a budget doesn’t sound like a lot of fun but if you want financial security and to reach your financial goals than creating a budget and tracking your expenses is vital. I have created an easy to follow step-by-step plan below with a downloadable monthly template.
Why should you create a budget?
- To work towards your short term and long term goals
- So don’t spend money you don’t have and end up in debt
- To be prepare for emergencies
- It makes you aware of where you are wasting your money
- It helps you sleep at night knowing you are in control
- Gather all relevant paperwork
Three months bank statements and credit card bills
- Any receipts you have
- Household bills
- Income documents
- Make a note of all income sources
- Income from employment/self-employment
- Benefits and tax credits
- Maintenance payments
- Any other income
- Make a note of your essential expenses
Categorise essential expenses into housing (mortgage/rent), debt repayments, utility bills, groceries, childcare etc. Remember to include any annual expenses that may not show in the last three months bank statements.
- Make a note of your discretionary spending
Categorise your discretionary spending into clothing, entertainment, socialising, holidays etc. Try to be as accurate as you can using your bank statements and credit card bills, it is going to be difficult to determine exactly what you’re spending your money on if you tend to use cash and and don’t keep receipts. But don’t worry, estimate as well as you can if you are not sure.
- Download the Monthly Expenses and Monthly Budget templates
- Monthly Expenses template
Enter all the categories from above you have gathered above and calculate an average of your income and expenses per month.
- Review your expenditure
How much are you left with at the end of each month? Are you spending more than you are earning? Are you not saving enough for your goals? Review your expenditure and determine which categories you can cut back on. Money Saving Expert has a lot of suggestions on how reduce your bills and expenses.
- Create your budget
Once you’ve reviewed your expenditure and decided how much you will allocate to each spending category, enter the information into the Monthly Budget template. Once you’ve created your budget, it’s important to continually monitor and track your expenses. Be disciplined and try to stick to your budget as closely as possible. You may not get the budget right the first month, but that’s okay. Recognise where you went wrong and create a better budget for the next month.
- If you’re income varies, you may wish to take a conservative approach and take the lowest income in the last three months rather than an average.
- Use an app to track your expenses as soon as you make them so that you don’t forget to record them when you get home. I use Money Lover myself.
- Be clear on what your financial goals are and what you’re saving for. If you don’t know what you’re saving for then how do you know if your monthly savings are enough?
- If you overspend, don’t scrap your budget and give up. Recognise why you overpsent and try to reduce your spending in another category. If you’re not able to make it up elsewhere, then don’t worry, just stick to your budget as well as you can. At the end of the month you may want to re-visit your budget to determine where you can improve it.
- Automate your savings. For example, if you intend to save £100 per month set up a £100 standing order from your current account to your savings account on the day you get paid. This way you are less tempted to spend more than you intend to if you cannot see the money in your account.
- If you feel that you simply do not have sufficient income to meet your goals than try increasing your income with these active income ideas.