How To Budget: The Ultimate Guide To Budgeting!
How to budget? Really? Why should I?
If you are new to personal finance, then budgeting can sound like a yawnfest.
But honestly, setting a budget can be the difference between you feeling completely skint and feeling much more wealthy over the course of a month.
If the word “budget” makes you want to gnaw your own leg off, then call it a “money plan” or “life plan”.
Ultimately it’s just a way of you being able to take control of your money so that you can do what you want with it (and your life). And not keep running out and feeling skint and miserable.
Show your money who’s boss!
What is a budget? (Budget definition)
A budget is simply a plan for what to do with your money.
It doesn’t have to be a spreadsheet.
It doesn’t have to be complicated.
But it can change your life!
Budgeting is not about depriving yourself
Trying to stick to a budget can conjure up images of going without. Perhaps it makes you think of going on a diet, feeling that you are not allowed to eat anything you like.
But it’s not about that at all.
When you work out how you are going to spend a month’s money (or a week’s) you should include treats and things that you want. Otherwise you don’t stand any chance of sticking to it.
So what is a budget all about?
A budget takes into account your money coming in and all your expenses.
If you work out how you are going to spend all of your money over each month – and stick to it – it has lots of amazing benefits.
– It can stop you running out of money before your next payday.
– It can help you save money.
– It can help you put aside money for big things like retirement or a deposit on a house.
– It can help you pay off debts whilst being able to do fun things.
– It can stop you wasting money on things you don’t need.
– It can help you free up money for things you really want.
But the main benefit is that it allows you to be mindful of your money – so that you can enjoy it, work it and manage it, giving you less sleepless nights and more control.
How to budget: the ultimate guide… here we go!
Simply put, you need to write down how much is coming in and then write down what’s coming out.
This will be the basis for your budgeting plan.
Let’s keep it basic to start with. You can just do this with a piece of paper and a pen. Or on your PC. A spreadsheet is great if you can use them, but it’s no biggie if you can’t.
What’s coming in
Income is usually quite easy as most of us get a salary once or twice a month or once a week. Or perhaps you have an income from benefits or your pension.
So check your payslip and/or your bank statements and see what’s coming in.
Write down any other income
If your income varies, write down a low estimate of what comes in on average.
What’s going out
Write down all of your expenses
Start with your home, list rent/mortgage, utilities, internet, TV etc
Add your transport expenses, car, insurance, tax, train tickets etc
Add debt repayments – what is the minimum payment that has to come out?
Add any direct debits – insurance, health, fitness, subscriptions etc
Once you know what HAS to come out, then you can see what’s left.
The next big expense for most people is food and drink/ groceries. This is a spending area that is really easy to reduce if you aren’t already on top of it and want to save money. But in the meantime check what you currently spend and add it to your list.
Whatever’s left is what you’ve got for saving, over paying to reduce debts, investing and FUN!
Now you can use your budgeting plan to fulfil your money goals
If you’ve thought about your money goals then you’ll know what to allocate some of this money towards.
It could be that you want to pay off debts, like me. I am currently allocating a quarter of my income to aggressively paying off debts.
Perhaps you are saving up for retirement, or looking to invest in something to generate an income. Have you worked out how long it will take you to get to where you want to go? If so you’ll know how much to set aside. If not then these articles might help.
The fun stuff also goes in your budgeting plan
When you decide to do a money plan, it can be tempting to go all monastic and get your itchy hair shirt on ready for some self flagellation. In other words, you give up all fun stuff in the hope of paying off debts or saving money more quickly.
Don’t do this if you can help it. Life is for living and you need things to perk your spirits and to look forward to. These don’t have to be massive financial outlays but if you really look forward to a coffee in the morning at your local baristas then HAVE your coffee!
Just remember to put down $60 a month or however much your version adds up to on the budget.
For me posh coffee is a much more occasional treat than it used to be, but I still live for a restaurant dinner once in a while, so that goes into my fun stuff budget.
Knowing that I have that treat ahead makes it easier to make cuts elsewhere because I know I’ve got something to look forward to in the month ahead.
The ultimate guide to budgeting ninja tip: Leave yourself a bit of space
Try to leave a bit of unallocated funds in the budget – especially as you start out. Some types of budgeting say you should assign every dollar a job, but it is easy to forget things and sudden bills do crop up. If you do want to allocate your “spare cash” a job, call it your emergency buffer if you like. A bit of cash in the bank is always handy if you can keep it there!
If you have or are building up an emergency fund, even better. You know you’ve got it covered.
There is more than one way to skin a budgeting plan
How do other people work out THEIR money plans?
There are LOTS of different ways to portion out your pie. But a few people have come up with some general rules of thumb to start you off.
The 50/30/20 Rule
The 50/30/20 rule is a way of dividing up your income so that you have the basics, the future and the fun stuff covered.
It goes like this:
50% of income goes on the basics of life: living expenses – housing, utilities, transport, grocery shopping.
20% (minimum) goes on the sensible stuff: financial goals like retirement, emergency funds.
30% goes on the fun stuff like entertainment, fitness, clothes, shopping.
Find out more about the 50 30 20 rule here.
The 80/20 Rule
This rule is like it sounds: you set aside 20% of every pay packet and live off the remaining 80%.
If your income goes up you still put aside 20%. Same with a bonus or a side hustle.
What you do with the 20% is up to you but it must either be long term saving, pension fund or 401k, or a combination of both.
For me, I find drilling down into the detail helps me to spend less, but if you need a simpler way to budget, this philosophy could work for you.
The Zero Based budget
This is how I have started to budget more recently and it gets addictive!
The idea behind a zero based budget is that you write down what your income is and then assign all of it to jobs, until there is zero left.
So you plan all your fortnightly or monthly spending in advance and then stick to it.
You work out exactly what is going on bills, savings, direct debits, insurance, coffee, taxis, groceries – the lot!
Then you just stick to it…
It’s more work, and yet in some ways it’s easier to stick to, because you know exactly what will suffer if you don’t stick to it. E.g. I know that if I overspend on Amazon, I may find it difficult to pay a couple of important bills that come late in the month. So I just try and stick to doing what I’d planned to do with my monthly wodge.
Find out more about zero based budgeting here.
The ultimate guide to budgeting: some key budget tips
If you are spending more than you earn, please STOP. Do the budget thing.
Avoid credit cards for sudden spends
Unless you are hit by a time specific need, such as urgent medical expenses, do not put something on a credit card if it can wait until you can afford it. I have done this – had stuff come up and put the money on a credit card, it is soooo easy to do. But if you don’t have the money to pay it back quickly it can take years to get rid of the debt.
If you can’t afford to spend the money, you probably can’t afford to pay off the credit card next month and then you’ll carry that debt with you AND the interest until you can get rid of it – slowly.
Don’t get a loan to buy a car.
Don’t get a loan to buy a car. Get a second hand car. Get an old banger if needs be (but not so rubbish you end up spending a fortune getting it roadworthy). Don’t get that 4 wheel drive flashy number if you can’t afford it. Don’t get anything if you can’t afford it, but especially not a car.
Don’t spend more than 25% on your home.
Some people say don’t spend more than 25% of your income on where you live. (Rent or buy). I think that’s tricky when you first move to a big city where you often spend more. But as you get older, it’s tempting to spend lots on your dream space. If you keep to the 25% rule you’re never overstretching yourself.
P.S. I spend about 20% on mine. It’s by a main road, which is not great but that’s the compromise we made to be able to afford where we live.
Spend on your pension.
If your budget can afford it, spend as much on your pension as you can. Saving for your retirement is as, if not MORE expensive than buying a house.
It’s a no-brainer to save for retirement – especially if your employer is contributing towards it. It is free money and will grow over the years without you doing anything. Your future self will love you for it.
Where can I find budget templates to make a budget?
There are some great downloadable templates here:
If you’re after something prettier, head to my Pinterest Board where I’ve pinned several budget printables and planners that you can check out.
More resources to start your budgeting plan
I hope you’ve found this article useful. If you are trying to get your head round managing your money here are a couple more that might pull your chain.
Comment below if you have any questions and if you use Pinterest, I would be thrilled if you pinned this article. 🙂
Have you started your own budgeting plan? Any more tips on how to budget? I’d love to hear from you.