Budgeting

Budgeting just means keeping track of where your money is going, and where you want it to go. It is a vital part of managing your money.

Step 1: Gather information about your current spending 🕵️

In order to create a realistic budget, you first need to understand your current spending. Without this reference point, your budget will be divorced from reality from the start.

While fixed costs such as your phone bill, council tax, subscriptions etc are typically easy to recall, others are much more difficult to put a monthly average on. This can be because they’re spread out across multiple transactions (food, going out) or because they happen very infrequently (vehicle maintenance, holidays).

You can’t rely on assumptions of how much you think you spend on these things – this will not be accurate. Instead you must check your actual transaction history. There are a few ways of doing this, described below.

Whatever method you use, try to go back at least 6 months. A full year is even better if you can. This will help you catch infrequent expenses such as Christmas, holidays, annual bills, household and vehicle maintenance, etc.

Check your banking app(s)

Many banks now offer transaction categorisation in their apps. Search your bank name + ‘spending insights’ for instructions on how to access this.

Note: the quality of the categorisation may vary, and your bank may or may not allow you to manually override how transactions are categorised or create custom categories that better suit your needs. But if you spend mainly/entirely from one account, and that bank provides sufficient functionality, this could be all you need to get going.

Aggregation apps

If you use multiple different bank accounts and/or credit cards and want to see all transactions categorised together inside one app, there are some options listed below

These services will generally cost money on a subscription basis.

Make a spreadsheet

If you want to be more hands on, or want to consolidate information from multiple bank accounts without paying for an app subscription, you can make a spreadsheet.

All bank accounts and credit cards should let you download your past transactions as a csv file, which you can then open in any spreadsheet program (Excel, Google Sheets, Numbers etc) to categorise and analyse however you like.

If you’re not familiar with spreadsheets, there are plenty of tutorials out there to help you and it is a very useful skill to learn.

Step 2: Think about stuff 🤔

Once you know how much you’re currently spending on each category per month, your next step is to think about how much you want to assign to each category.

Plan for any spending reductions

If you came to the conclusion that you need to reduce your outgoings, you’ll want to think about where exactly this can come from. Use the data you’ve gathered to help you. Were there any categories that surprised you, where you’re spending more than you thought, or don’t feel you’re getting as much value for your money?

Plan in advance for the practicalities involved in changing your spending habits. For example, if you want to reduce your food costs, think about what exactly will you do to achieve this. Will you change which supermarkets you use, what type of food you eat, or how often you cook?

If you shop for ‘stuff’ more often than you’d like, have a look at our ‘Should I Buy This?‘ guide.

Reviewing your fixed costs is also worthwhile. Bills come every month, so even a small saving on a regular bill adds up. Moneysavingexpert is a great resource to find the best deals.

Plan for future goals

Go through your savings goals and calculate how much you need to save per month to afford your goals. Try to work within what you have left to cover your remaining spending categories. It may take a few drafts to come up with a balance you’re happy with between current spending and future goals.

You may want to move the money intended for your future goals into a separate savings account as soon as your income arrives on payday. This technique is often called ‘paying yourself first’.

Plan for reasonable discretionary spending

Doing this exercise it becomes obvious that reducing your costs accelerates your progress towards your goals. But be careful not to take this too far. Remember the aim is to have a sustainable level of spending in line with your personal goals and priorities, not to get as close to £0 spending as possible. If you go overboard with the belt-tightening, you risk relapsing with a spending spree, or sticking to an overly restrictive budget and making yourself miserable.

While many people tend towards overspending if they don’t keep an eye on their money, others have the reverse problem, and become anxious, guilty or fearful about any spending at all. If this is you, a budget can actually help:

• Knowing that the money to pay your bills, food and other essentials is already set aside can relieve anxiety about whether it’s safe to spend on other things
• Budget some money specifically for ‘fun’ spending. That money is not allowed to be used for anything else! Keep your fun money in a separate account to maintain the distinction and help you feel safe to spend it
• Take the time reflect about the underlying reasons. What feelings or worries stop you from spending? Do you have previous experiences of scarcity? Are there different ways you can think about your needs and goals to remind yourself of why it’s worthwhile spending money on them?

Step 3: Record and adjust over time 🔄

Having thought about what you want your spending and saving to look like in future, you will want to record this somewhere so you can have some way to comparing your intentions to your spending in real time. It’s rare that things will go exactly as planned, especially for a first draft.

You can create a budget using a budgeting app, a spreadsheet, pen and paper, whatever works for you – we have some recommendations below.

Step 4: Spending dilemma? Use your budget 🔮