How to budget your money effectively

If you want to take control of your finances, it’s important to understand how to budget effectively. The first step in personal finance planning is to analyse your incomings and outgoings, and a budget planner can help with this. Whether you want to increase your savings or pay off debts, mastering how to budget your finances can help you to meet your financial goals.

On this page, we’ll delve into the significance of budget planning, why it’s a good idea to use a budget planner, how budgeting helps, and ideas for how to budget your money.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

Budgeting helps you plan your finances and map out how you will spend your money.

A budget is a financial plan outlining an organisation's or individual's income and expenditures over a specific period, usually a month or a year. Learning how to create a budget and planning how to manage money can help you prioritise your spending. People will often have a household budget plan so they can see how much they are spending on bills and living expenses and how much they will have left over for other things.

A budget planner is a tool or document that records all of your income and outgoings so you can easily evaluate your finances. There are many types of budget planners available, from apps and interactive online budgeting tools to a simple spreadsheet or even pen and paper.

If you haven’t done it before, budget planning might seem like a daunting process, but there’s really not much to it. Budget planning can be as simple as making a list of your income and all your outgoings, including household bills, living expenses, travel, and so on (see our handy budget planner below). Once you know how much of your income you need to spend, you can figure out how much money you have left each month, as well as how much you could save.

Learning how to budget and save money can help you plan your longer-term finances, including planning for larger purchases. For example, you could use a budget planner to get out of debt, or save for a mortgage deposit, car, or holiday.

Knowing how to budget money can help you answer two key questions:

If you don’t keep track of your finances, it’s pretty easy to spend more than you earn, potentially leading to financial problems down the road. You’ll notice that you’re spending beyond your means when you start dipping into your savings or getting into debt.

Budget planning can help you assess your financial situation and identify ways you could reduce your spending. It gives you a clear overview of how much money you’re spending, and what you’re spending it on. Knowing how to make a budget plan is important, as it gives you an accurate assessment of your finances so you can make better financial decisions for the future.

Once you know where you’re spending your money, you can then start to prioritise your expenses. This, of course, depends on your own financial priorities and needs.

Although a budget plan gives you the framework you need to work out your budget, the next step is to stick to it. It’s a good idea to make sure your budget is realistic and straightforward. Otherwise, it’s much more difficult to make budget planning an everyday part of your spending.

Learning how to manage your money is a key skill for maintaining financial stability. Budget planning can help in a few different ways, including the following:

• Budgeting puts you in control of your finances, both in the short and long term.

• It allows you to prioritise what you should be spending your money on, and identify areas where you could save.

• A budget helps you pay bills on time, build an emergency fund, and save for major expenses like a car or home.

• Knowing how to budget enables you to monitor your financial status and adjust spending when necessary.

• You’ll have a solid plan that’s easy to follow, empowering you to make changes to your lifestyle and adopt healthier financial habits.

• Budgeting reduces the likelihood of encountering unexpected financial surprises and overspending, thereby lowering the risk of debt.

• You’re more likely to be able to save money. Once you’ve put your budget together, it might be worth finding a savings account that suits your needs.

At this point, you’re probably wondering, “how do you budget?” Here are some step-by-step budgeting tips that can help:

Set aside some time to work out how you want to manage your money. While the best budgets are pretty simple, and therefore easier to stick to, you will need to dedicate some time to creating it (try our easy budget planner below to get started). You’ll need to gather documents covering your income, outgoings, and living expenses, such as bank statements, payslips, and household bills, so you have all the information to hand as you build your money management plan.

When you’re making a budget, income doesn’t just mean your regular earnings from employment, but also other sources of income such as savings or investments. Calculate your total monthly income from all sources and average it out to get a rough idea of your monthly earnings. Remember to exclude any tax you might have to pay from your income figure. This is important, as you need a clear overview of what your income is before you deduct your monthly expenses.

Your next step is to calculate your monthly expenses. Take a close look at your bank and credit card statements, either by printing them out and using a highlighter or using apps for automated tracking. It’s a good idea to categorise your outgoings so you can keep track of where your money is going.

For example, you might use categories like household bills, travel, leisure, and children. Once you’ve calculated your monthly outgoings, you then need to subtract this from your monthly income. The figure left over after deducting your outgoings from your income is your living expenses. These typically include things like the weekly household shop and your mobile phone bill.

Once you’ve assessed your spending habits, take a moment to list any short- or long-term financial goals. Short-term goals include things like building an emergency fund or reducing credit card debt. Conversely, long-term objectives, like saving for retirement or funding a child’s education, may take decades. While goals can evolve, defining them can mean you’re more likely to stick to your budget. For instance, knowing you’re saving for a holiday may make you more motivated to cut back on your spending.

Now that you have an accurate idea of your monthly spending, it should be easier to create your own budget plan. You can use our easy budget template below to help you get started, and you can see how it’s done in the example we’ve provided. 

For extra motivation when budgeting and saving, here are some more budget plan ideas:

• 50/30/20 rule: With the popular 50/30/20 spending plan, you divide your net income into three categories: 50% for needs, 30% for wants, and 20% for financial goals like savings or debt repayment. You could then set up automatic transfers to a designated savings account based on your budget plan.

• Zero-based budgeting: Zero-based budgeting involves giving a purpose to every pound you spend, ensuring that your expenses match your take-home pay. This detailed approach can provide clarity on your spending habits. However, it’s important to maintain a healthy emergency fund to handle unexpected expenses or increases in costs.

• Cash envelope system: The envelope system, also known as cash stuffing, involves allocating physical cash into labelled envelopes for different spending categories. Once the cash in an envelope is spent, you shouldn’t spend any more money in that category unless funds are shifted from another envelope. This method might be ideal if you’re keen on strict money management.

Learning how to stick to a budget can be the hardest part of budgeting. It’s a good idea to revisit your budget plan regularly so you stay on top of your finances and can easily identify any areas of overspending or opportunities to save. It’s important to keep track of your budget, because you’ll notice any overspending more quickly and can make adjustments where you need to. 

If you find you’re overspending, you might consider cutting back on non-essential expenses - think about opting for home entertainment instead of outings. If you still need to balance your budget, reassess your fixed expenses like insurance premiums. Remember, even small changes can lead to significant savings. Discover more tips on how to save money for further inspiration.

Use our free budget planner to organise your finances, get on top of your monthly expenditure, and work out where you’ll be able to make savings. You can see how it’s done with the example we’ve provided. All you need to do is copy or print the blank budget planner, input your figures, and use the calculation at the end to get a complete picture of your finances. Once that’s done, you could even work out an achievable monthly savings target and open a savings account, knowing that you can comfortably save a certain amount of money each month.

This example is based on the income from one adult in a small family household with one child and no pets. As you’ll see, there is some money left over each month which could be used to grow a savings pot.

Once you’ve input all your expenses, deduct them from your total income. This will give you a total monthly and yearly budget which you can use to make more informed financial decisions.

Now you’ve seen an example of how to make a budget, it’s time to create your own. You can use this budget planner template to track your income, categorise your expenses, and identify areas where you can save.

Whether your goal is to boost your savings, pay off debts, or plan for the future, budgeting tools can help you prioritise your spending. If you’ve discovered spare cash from your budgeting plan, consider maximising your savings by registering for an account at Raisin UK. It’s free, quick, and easy to sign up and, once registered, you can open a savings account from a variety of banks and building societies to suit your needs. Register for an account now, and watch your savings grow.