How to make a budget (and stick to it)
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Making a budget is fundamental to almost any financial goals you might have.
- Want to get out of debt? Make a budget.
- Want to retire early? Make a budget.
- Want to reduce your work hours so you can spend more time with your family? Make a budget.
What is a budget?
A good budget is a plan for your money. If you feel like your spending is out of control, a budget is the best way to take back control. If you feel like you have no idea where your money goes, a budget allows you to see exactly what, when and why you spend (spoiler: you are spending more on food than you think). If you know you earn £1,500 a month, a budget lays out where every penny of that £1,500 will go.
A good budget allows you to forecast your spending and see if you actually can afford that holiday/more expensive car. It also allows you to work out when you might be able to retire, how long you could survive on your emergency fund, and when you can finally pay off the mortgage.
Should you keep a monthly or yearly budget?
Most people, when they first start budgeting, only look at their monthly expenses. They might include a few ‘sinking fund’ expenses, such as car insurance, taxes or annual holiday – but they rarely plan out a full year.
I actually think an annual budget – which is what a business typically uses – is more sensible. It allows you to actually see when large purchases are going to fall, and what that does to your bottom line.
I’m also somewhat unusual in that I would encourage you to look beyond the annual budget and see what major expenses you can plan for in the next few years. We often treat things like ‘my laptop died’ as an emergency. But in actuality, everything we own has a fairly predictable lifespan. Knowing that you are likely to replace a washing machine or need to re-do your roof in the next few years allows you to actually build a ‘true’ picture of your finances and budget the right amount of money each month towards maintenance and replacements.
What should be in my budget?
The following categories should all be account for in your budget.
The best part of your budget – your income!
Typically this is wages from a job or self-employment, but can also include student loans, scholarships, benefit payments, alimony, interest on savings, gifts and inheritances.
Increasing your income is an often overlooked method for improving your budget. You can read my post about increasing your income by earning money on the side, pick up a part-time job, ask for a raise, or look for a better paying job.
Fixed monthly expenses
Typically includes things like:
- Streaming services (Netflix, Spotify et al)
- Council tax
And more! The easiest way to figure out what these are is to go back through the last 3 months of statements from your bank/credit card companies and put them into your spreadsheet or app as you spot them.
Variable monthly expenses
Typically includes things like:
- Eating out
- Travel expenses (bus/train fares and petrol)
- Misc. purchases such as clothing, books, gadgets etc.
The best way to put an amount against these is to go back through the last 6 months of statements and average out how much you spend in each category.
You can also start to forecast some of the more expensive items. For example, I know I wear through a pair of shoes about every 12 months, so I can budget an extra £60 to spend on clothing in the month that comes due. Equally, you might give yourself a higher amount for eating out in months that include birthdays or anniversaries. This is where having an annual budget as opposed to a monthly budget really starts to shine.
Sinking funds/annual expenses
This is typically a one-off large expense that you save up for each month. Often includes things like:
- Car insurance
- Christmas gifts/travel
- Annual vacation
You can probably predict a cost for these fairly accurately, and then divide by the months remaining before the fee is due to get the amount you should be putting away each month.
For example, let’s say your MOT is due in four months and is likely to cost £100 including repairs. You would need to save £25 a month in order to account for that upcoming expense.
If you in high-interest debt (credit cards, overdraft or a loan) you should prioritise repaying it as quickly as possible. This means you should plan to make more than the minimum payments to avoid paying excessive amounts of interest.
In addition, paying off debt will free up a proportion of your monthly income for other things.
Include the payment in your budget as a variable expense – make the minimum payment, plus anything extra you can throw at it.
The rule of thumb for an emergency fund is £1000 if you are in high interest debt (credit card debt), and 3-6 months living expenses if you only have low interest debt (student loans, mortgage).
However, the size of your emergency fund should be dependent on your own situation. If you are a student with no dependents and low expenses, a 6 month emergency fund is overkill. If you are a freelancer with children to support, you may want a year of living expenses socked away.
You should include topping up your emergency fund as a fixed expense until you reach the number that you think is right for you.
Upcoming major expenses
This encompasses major foreseeable expenses such as:
- Getting married
- Buying a house
- Having a child
- College tuition for yourself or children
- House repairs/renovations
- Ambitious travel plans and life goals
You can look up the average cost of all of these milestones. You may decide there’s no way that you’ll spend £30k on a wedding, but it will give you a sense of scale and what a ‘typical’ amount to aim for is.
The sooner you start saving for them, the lower the monthly amount you’ll have to put away is!
I’ll cover off the best places to keep your money until you need it in a future blog post.
Budget app, budget spreadsheet or budget book?
There are a range of options for tracking your money and setting up a budget. Here are just a few options and my thoughts on them.
Budget / money tracking apps
The benefits of these budget tracking apps include:
- Some apps can sync with your bank accounts, so you get automatic tracking and don’t have to enter transactions manually.
- Phones are portable, so you can quickly categorise transactions on the go.
- Automated notifications will let you know when you are going over budget.
- Automatic back-up of your data to the cloud.
The cons of these budget tracking apps include:
- Ability to sync with your bank accounts may present a security risk and may contravene your banks terms and conditions. This is particularly true if you live in the UK, in which case the auto tracking of something like Mint is no longer possible.
- Rigid system may or may not work for you. Some people love budget apps. I personally find being locked into someone else’s system annoying, and there’s always something I want to know, or to work out that the system doesn’t let me.
- Letting an app automatically track your transactions means you’re not having to think about them as hard.
- They can be expensive or filled with adverts (adverts being exactly what you don’t want when trying to save money!).
- They can be shut down. Don’t even get me started on the traumatic experience that was losing Wesabe way back when.
You can also build your own budget spreadsheet, which has the massive benefit of forcing you to really think about what is included and why.
The benefits of of budget spreadsheets include:
- They can be as simple or as complex as you want, and can be customised to fit your needs and goals.
- You are in complete control of what appears and how it is tracked.
- Spreadsheets can be saved to your own computer as well as backed up to the cloud. You own the data!
- Manually entering each transaction means you really think about where your money is going.
The cons of budget spreadsheets include:
- You don’t get automatic tracking, and you can miss transactions, or mistype amounts quite easily if you’re not filling it out regularly.
- There’s a steep learning curve if you’re not comfortable with spreadsheets already.
Budget books are pen and paper affairs that allow you to track your monthly expenditure. There are many beautifully designed budget books on Etsy*, or you can get something more straightforward* (Amazon link). And of course, you can find dozens of printables or bullet journal budget inspiration.
The benefits of budget books include:
- Books are quite portable, so you can carry it with you.
- Writing everything down forces you to really think about and process it.
- Printables can be incorporated into any other planner you have.
I actually recommend doing it with pen and paper the first time. This forces you to really think about what categories you have, what you spend and why.
I personally prefer a spreadsheet for my won budget.
Help! I can’t balance my budget!
The first time I ran this exercise I was working an entry-level job, I had credit-card debt, my partner was underemployed, we were in the middle of a recession, and I was spending way too much on rent. No matter what I did I couldn’t make my budget work. It told me the truth: that I would keep getting further into debt.
We have a lot of shame and emotion around money. And it’s a shameful fact of life that we live in a society that has massive inequality in terms of wealth.
But the fact is, the maths doesn’t lie and it is much better to be aware of your situation and be able to deal with it than to be in denial until you dig yourself into a hole you can’t escape.
I’ve talked a bit about how to spend less than you earn before, and I will be adding to that with more of an ’emergency’ post for when you are in severe financial trouble soon.
But the most important thing to remember is that your budget is flexible and it will change over time. The way things are right now are not the way they will always be.
This too shall passPersian adage