Creating a budget

The information in this guide was last updated on 26/02/2014

Finding out how to budget is the key to taking control of your finances. It’s all about knowing what comes in and what goes out. Drawing up a monthly budget planner may take a little bit of effort, but once it’s up and running it can remove a lot of stress, both day to day and in the future too.

1. Keep a spending diary

A successful budget isn’t just a plan on paper. It needs to work with the way you and your family spend money day to day. Your bank statement is a good starting point, although it can’t tell you what you’ve paid for using cash. To find out what you’re really spending, try keeping a spending diary for a month. You can use a notebook to jot down what you spend each day, or if you have a smartphone, you can download an app – many are free. It’s really important to be accurate about what you spend – this information is just for you, so don’t be tempted to leave things out. 

2. Use our budget calculator

Use our handy budget calculator to work out your incoming and outgoing costs. It's quick and easy to use – make sure you have your monthly statements and any regular bills to hand when you fill it out.

3. Prioritise your spending

If your costs are more than the money you have coming in, it’s time to make your money habits more efficient. The first step to managing money is to prioritise what you’re spending it on.

Top of the priority list are essentials for living – things like food, shelter (rent or mortgage, plus council tax), heat, light, clothing, any prescriptions you need and your transport costs. You should also factor in essential insurance – vehicle insurance is a legal requirement, and home insurance is often a wise investment too.

Although you can’t practically do without these things, you can think about ways to cut the costs – switching your energy to another provider or shopping around for insurance quotes, for example. Get tips on how to cut back.

Next on your list are important bills that, while not strictly essential, you might only cut back on as a very last resort: things like your phone and internet services, TV licence and channel subscriptions.If all your essentials are taken care of and you have some money to spare, you can then think about paying into savings, or splashing out on luxuries like entertainment, holidays and restaurant meals.

4. Set financial goals

If you want to make a large purchase, or save for future costs like retirement or university, it makes sense to set savings goals to work towards. This can help motivate you day to day. For more savings tips see make the most of your savings.

If you have debts to pay off, like credit cards or overdrafts, it’s probably best to pay these off first, before you start saving. This is because the interest you pay for borrowing this money is likely to be much higher than any interest you’ll make through savings. Prioritise your payments – pay off the debt that charges the highest rate of interest first.