Budgeting just means keeping track of where your money is going, and where you want it to go. It’s fundamental to a sound financial footing.
Creating a Budget ✍️
The first step to creating a budget is to understand your current spending. Make a list of:
- Fixed expenditure – spending on "needs", which you can't choose to avoid (e.g. rent/mortgage, utilities, debt payments, food, petrol)
- Discretionary expenditure – spending on "wants", which you could choose to reduce (e.g. eating out, hobbies, entertainment)
- Infrequent large expenses (e.g. annual MOT or insurance payments, Christmas presents, holidays). It can be useful to convert the annual costs into a monthly bill for budgeting purposes.
If you need some help coming up with categories to consider, see our Living Costs page.
Next, you need to work out how much you actually spend on each item in your list. The fastest way to do this is to go through several months of transactions, and assign every transaction into one category or another. This should also help ensure you haven't missed out any categories of spending from your list. Remember to account for infrequent large expenses as well, e.g. don't forget Christmas if it's July!
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 put in each category, and create a system for recording those intentions and comparing them to your spending in real time. I.e., a budget!
You can create a budget using a budgeting app, a spreadsheet, pen and paper, whatever works for you – we have some recommendations below.
Controlling your spending 📉
If you're spending more than you take home, or aren't left with enough room to save for your goals, then you need to adjust your spending. Think about what in your budget is actually flexible, using the data you've gathered to help you. Were there any categories that surprised you, where you're spending more than you thought?
Discretionary costs are usually easier to reduce than fixed costs – reducing how often you eat out is lower hanging fruit than moving house to reduce your rent or mortgage. Reducing discretionary spending usually comes down to changing habits. If you shop for 'stuff' more often than you'd like, have a look at our 'Should I Buy This?' guide.
That said, bills come every month, so even a small saving adds up. Many people significantly overpay on their household bills, and a thorough review of gas/electricity/home phone/broadband/mobile phone/banking can yield significant savings.
You could also let your savings goals direct your spending – putting away money for the goals you care most about on payday, and working with what you have left to divide into remaining categories. This technique is called 'paying yourself first'.
Get comfortable with reasonable spending ✅
Do be aware that while frugality has its benefits, it is very possible to go overboard with the belt-tightening, and risk relapsing with a spending spree, or sticking to a too-small budget and making yourself miserable. Remember the aim is to have a sustainable level of spending in line with your personal goals and priorities, not that all spending is 'bad'.
While many people tend towards overspending if they don't budget and monitor their transactions, others have the reverse problem, and can miss out on things they find worthwhile because they're reluctant to spend money. If you find that you feel guilty or fearful about spending money, a budget can actually help:
- Writing a budget gives you an objective way to calculate whether an expense is within your means.
- 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?
Budgeting Tools 🧮
Envelope budgeting systems
Envelope-based budgeting systems are the digital equivalent of dividing cash into different envelopes labelled for a specific purpose e.g. food, bills, clothing, etc. It's a popular system which is very effective for both over- and under-spenders.
- YNAB (34 day free trial, $99/year) – The original (and arguably best) digital envelope budgeting software. Commonly recommended, loved by its users and has a friendly and encouraging subreddit. It can automatically connect to UK banks to import your transactions.
Alternatives that offer something similar;
- Aspire Budget (Free of charge) – Excel or Google Sheets-based budget with an active Reddit community
- Yet Another Budgeting Spreadsheet (YABS) (free of charge) – Excel or Google Sheets spreadsheet, modelled on an old version of YNAB. Best used by people already familiar with YNAB.
- Actual Budget (30 day free trial, $4/month) – Desktop app similar to previous versions of YNAB
- Goodbudget (Free basic tier, $60/year for unlimited tier)
The introduction of open banking is seeing more account aggregation and budgeting software appear, allowing automated import of your transactions across multiple accounts straight into your budget. Many banks are also incorporating the facility into their apps.
Open banking-capable budgeting apps popular with UKPFers include;
- MoneyDashboard (Free of charge) – The stalwart of bank account aggregation
- Emma (Free basic tier, £5/month paid) – Fun app that provides a Monzo-style spending analysis for your other current accounts
- Nova (Free basic tier, £5/month paid) – Gamified app system built around saving for goals.
- Moneyhub (6 month free trial, £9.99/year) – Targeted at advanced users, Moneyhub boasts the largest selection of banks and institutions to import from
None of the solutions above fit your needs? Take inspiration from these examples and adapt them to create your own bespoke budgeting tool!