Why it’s important to create a budget

Setting yourself a realistic budget can help you avoid falling into debt, make your money last and build wealth. Avoid common pitfalls that can lead to debt, such as spending beyond your means by knowing your income and expenses. Knowledge is power and knowing your finances will equip you to be in control of your money, rather than debt controlling you and your life choices.

Step 1. Set your monthly income

First things first, calculate your total monthly income from which all of your expenses will be paid. To do this look at your payslip and take the amount of pay minus contributions that have to be paid including tax, national insurance and pension contributions. Don’t include these things in your spending pot as they are must-haves, set the money aside for them from the start to make sure they are always paid.

If you have multiple income streams, again calculate your total income for the month and take off your tax, national insurance and pension. For people who are self-employed with a variable income, calculate your average lowest monthly income minus the above.

The amount of money left over after this is important because it’s the total amount of money that you have to pay for everything else that month. Pay all of your bills, fun money and savings from this pot of money. Know this figure so you can make sure you do not accidentally spend more than this.

Step 2. Set your monthly expenses

Plan, plan, plan, this is where a little time organising your budget can reap benefits. Use a budget planner tool, a spreadsheet or even

a notebook to record all of your expenses for the month. Include all bills, food, travel and any events that are coming up such as birthdays. Remember to be realistic about what you spend each month and allocate enough money towards this.

If you don’t know what you spend and when look through your bank account. Write down all of your regular payments and money for living expenses. Make a note of any yearly payments too, such as car tax. This will give you an idea of how much you need to allocate to each category in your budget. If you have credit to pay off, always prioritise paying off the high-interest credit first.

With the money that you have left set aside money for yearly payments, an emergency fund, savings and fun money. Setting up saving pots in your bank account and naming what they are for is a good way to keep you on track. Arrange standing orders to go straight into your different accounts after payday. This will help ensure that your money doesn’t accidentally get spent on other things.

If your budget is tight, utilise as many money-saving tips as you can, from reselling your unwanted clutter to using cashback websites.

Step 3. Track your spending

To see where your money is going, monitor your spending and record any purchases made on a spending tracker with the date, item and cost. Sometimes it’s a real eye-opener to see how much we spend on as we go through the month, it can sometimes show a different picture to what we remember.

Another benefit of tracking everything we spend and regularly checking our bank account is to stop yourself from accidentally overspending or going into your overdraft. We don’t want to pay those high-interest rates if we can help it.

If you are trying to cut back on your spending, firstly avoid temptation. Unfollow social media accounts that show shopping hauls or frequent ads that encourage you to buy.

Secondly, if you see something you want, give yourself time before you purchase – take a photo or screenshot or make a note of it. Come back to it a couple of days later, do you still want it? Does it bring you joy? Do you need it? Can you get it cheaper? Do you have the funds to buy it?

For more top tips to help you save money and stick to your budget click here.

Step 4. Review and revise your budget

At the end of the month, evaluate how the budget has gone. If you have slipped up, don’t give up. Persistence is the key, not perfection.

Does your budget need to be tweaked? Are there any one-off events coming up this month that need additional funds? Have you not spent some money that you had planned to spend? Any leftover money could go into saving pots or be used for fun money.

To a budget novice, this may all seem like a lot to take on, but the important thing to remember is to make a start. Implement these steps and you’ll be on the path to financial success!