A budget done correctly is the best possible tool for keeping your finances in check. To work out your budget, you need to answer the two following questions:
1. Do I spend more than I earn?
You might know this already, but even if you do, it can be helpful to put it down on paper. You can download our income and expenditure sheet to work out what’s coming in and going out each week or month.
If this looks daunting, don’t panic! Here’s a quick breakdown of how to get started.
First, work out your income. This can be done by looking at your pay slips and/or benefits letters. If you only know your hourly pay, use your best guess of how many hours you work per week, then multiply this by 52 and divide by 12 to get an idea of what you earn per month.
For example, if you work and are receiving Working Tax Credits, you would fill in the following boxes:
|Pay after tax|
|Working Tax Credits|
Add these figures together and you’ll have your total income.
To work out your expenditure, you can keep a spending diary and write down everything you buy for one week or one month, then estimate any other, less regular costs, such as hairdressing appointments. So, if you have two hairdressing appointments in one year, both costing £30, that’s £60 per year. To work out how much that would be per month, divide £60 by 12 (which is £5 per month). To work out the weekly cost, divide £60 by 52 (which is about £1.15 per week).
Once you’ve filled out as many categories from the income and expenditure sheet as you can, add them all up and you’ve got your total expenditure. Subtract this from your total income and you’ll find out how much you have left over, or how much you’re overspending.
Now that you’ve worked this out, you can answer the question:
2. What can I afford to spend?
The important thing to remember is that not all your expenses are equally important. For example, paying your Council Tax is essential while paying for a magazine is not.
We’ve split these expenditures into groups, based on how important each one is and the level of control you have over how much you spend on them.
If you think of these groups in terms of money jars, you would need to fill both the RED and ORANGE jars first, then the YELLOW jar and finally you could put any leftover money into the GREEN jar.
You can download and print our Priority Spending resource to help you keep track of what you need to pay. If this changes regularly, you could laminate the sheet and use a dry wipe pen to mark on which spending is a priority that week.
How to make a budget
We’ve said that a budget is very useful, but how do you make one? Here are some tips on how best to find out where you can save money.
1. Keep a spending diary. Write down what you spend and when, even if it’s just a quick trip to the corner shop. This can help you discover any excess spending.
2. Write a list of which days money comes in. If you know what you’re getting and when, that can make it easier to plan for paying your bills and rent. You can even set up a standing order to pay the money out for bills or rent as soon as it comes in.
3. Write a list of ALL your expenditure. It can be easy to forget about certain areas of expenditure, but it’s important that you keep track of exactly what you’re spending. This might include: pocket money, vet bills, birthday and Christmas presents, hairdressing, internet, tobacco and alcohol, leisure and hobbies.
4. Work out how much you’re spending each week. If you have some money left over, it can be helpful to save part of it for emergencies, such as if your washing machine breaks down. If you’re overspending each week, you can see exactly what you’re spending and where, which means it’s easier to cut back.
5. Can you reduce your expenditure by switching? For example, you could switch your provider for your internet, TV, gas, electric, or phone. Compare prices using an online comparison website, such as Uswitch or MoneySupermarket.
6. Can you reduce your food bill? Look into buying own brand goods, switching to a cheaper supermarket like Aldi or Lidl, cooking from scratch and reducing your food waste.
7. Can you reduce payments to creditors? Sometimes it’s possible to reduce how much you’re paying to creditors by, for example, offering a token payment.
8. Really think about your spending priorities. Look at the colour groups above and work out what you really need to spend and what you can save some money on.
- Use cash. Instead of paying by card, which can be difficult to keep track of, withdraw your budget in cash so you know exactly how much you have left to spend.
- Use a calendar. Mark the days you have money coming in using a green pen and use a red pen to mark down which days you have money going out regularly (for example, rent or bill payments).
- Keep a spending diary. Write down everything you buy on the day you buy it so you have a record of the smaller spends you make that eventually add up.