Money management: How to budget

We understand how overwhelming a rapid increase in your living expenses can be, especially if your income hasn’t kept up. Learning how to create a household budget can go a long way in helping to ease that pressure.

We believe knowing how to budget your money is an important skill that everyone should aim to learn. By examining your income, prioritising your expenses, and setting savings goals, you can create a personalised budget plan and work towards a more secure financial future.

To help you get your finances on track, we’ve outlined some key steps to follow below.

1.    Review your income and expenses

Start by looking at the money you have coming in each month. This includes your take-home pay, any benefits or tax credits you receive and any additional income you earn. Then look at your outgoings.

Your outgoings should include your rent or mortgage, bills, travel, food costs, subscriptions, etc. Make sure you include everything you spend on this list (including impulse buys) as it will help you to better understand your spending habits.

You can track this on a spreadsheet or, if you’d prefer to do it online, Money Helper’s Budget Planner (External) is a great tool. It’s free to use and has useful categories to make sure you don’t miss any outgoings.

2.    Identify essential vs non-essential costs

Once you’ve identified all your outgoings, categorise them into essential costs and non-essential costs. Your essential costs include your rent or mortgage, utilities, childcare costs, small bills such as Wi-Fi or insurance, and essentials such as food, travel, toiletries, and prescriptions.

Your non-essential costs include the things you enjoy but may not necessarily need, such as streaming subscriptions, eating out, impulse buys, etc. Doing this may help you to find some things you’re happy to cut back on, or do without, to help your money go a little further.

3.    Find your budgeting method 

Everyone’s situation is different so there isn’t a one-size-fits-all monthly budget you can follow. However, there is a tried and tested method that could help you develop good money management habits in the long term. The 50-30-20 budget rule is a popular technique that allocates your income based on essentials, non-essentials, and savings.

Remember, it’s important to allow flexibility when following this rule so you can adapt to your circumstances. This could include unexpected income changes, debt management, home repairs and unforeseen living expenses.

 What is the 50-30-20 budget rule?

The key to sticking to a budget is getting the balance right. If you’re too strict, you may find it hard to commit to. The 50-30-20 budget rule is a great way of achieving balance. The aim is that you spend:

• 50% of your income on essentials.
• 30% on day-to-day spending and non-essentials.
• 20% on savings or clearing debts.

So, for example, if your take-home pay after tax is £1,800, following this rule means each month you’d have £900 to spend on essentials, £540 for non-essentials and £360 for savings and debt repayment.

What is the 70-20-10 budget rule?

With the soaring cost of living, you may be finding the 50-30-20 rule increasingly difficult to follow. If so, don’t worry, you could try adopting the 70-20-10 rule instead. This means allocating:

• 70% of your income for essentials.
• 20% on day-to-day spending and non-essentials.
• 10% on savings or clearing debt.

As a guide, with an income of £1,800 after tax, you can allocate £1,260 for essentials, £360 for non-essentials and £180 towards savings or paying off any debt.

4.    Pay your debts first 

Paying off debt is just as important as building your savings pot, so it can be tricky to know which to prioritise. While we always advocate the importance of saving, it may not necessarily be the right thing if you’ve built up significant personal loan or credit card debt.

You should always try to pay off your debt before you save and the reason for this is quite simple - debt accumulates interest, which could cost you hundreds of pounds every year.

This can be especially true of credit cards, which can have much higher interest rates than personal loans. This means the amount of interest you’re charged on a credit card could be significantly higher than the interest you could earn with a savings account.

 5.    Keep your budgeting plan on track

Once you’re happy with your budgeting plan, try your best to stick to it. Unexpected costs can occur, so expect your budget to change a little and be prepared to adapt. By continuing to track what you’re spending, you can make sure you stay on track, even if you need to be more flexible from time to time.