Get a handle on your finances with our five-step method to developing a household budget that is reasonable, and follow our recommendations for keeping to the budget once you’ve created it.

One essential life skill that you probably did not pick up in school is budgeting, despite the fact that you probably acquired algebra, history, and geography.

If you don’t have a budget for your household, you’re basically just spending money without any idea of where it’s going or why. It’s possible that it will work for a little while, but if you run into a financial roadblock or you simply want to make the money you already have stretch further, creating a budget is an absolute must.

If you have a financial goal in mind, such as paying off your debt, saving for a down payment on a house, or putting money away for retirement, this will help you work towards achieving that goal as well.

The process of developing a detailed budget can be broken down into the following five steps, which are outlined below. If you already have a budget written out, you can move ahead to our advice on how to keep a budget balanced and manage it.

How to construct a spending plan

If you have never created a budget before, or if you are just looking for a fresh start with your finances, be sure to follow the following five guidelines.

1. Get yourself organised, and go at your own pace.

Make sure you give yourself at least an hour to develop your financial plan. If you rush through it, you can make some blunders.

Before you get started, it is recommended that you bring together all of the necessary documentation, which includes acquiring the following items:

a few months’ worth of bank statements, your most current credit card bills, copies of your household expenses, information on any extra income you may have, as well as facts regarding your savings and pension contributions.

The majority of this “paperwork” will be completed digitally these days; therefore, it is probably better to open numerous tabs and emails on your phone or laptop; nevertheless, you can print things out if you believe doing so will be of assistance to you.

The example that follows shows that our budgeter earns a monthly salary in addition to supplemental income from occasional freelance employment. If the majority of your money is received on a more regular basis, you might find it more convenient to create a budget on a weekly or biweekly basis.

2. Total up all of your earnings.

Here is an illustration of how the “income” component of a budget might look. In order to demonstrate how it would function, we’ve included a number of different sources of income, but in this case, it’s likely enough to only include your regular wage (which would be much easier).

Previous three months
REGULAR INCOME Jan Feb Mar Average
Salary £1,665 £1,665 £1,665 £1,665
Freelance income £150 £50 £200 £133
TOTAL £1,815 £1,715 £1,865 £1,798

Make a note of your usual earnings from employment (after deductions for things like taxes, student loan payments, and pension contributions, etc.), and then put in any additional sources of income, such as those from savings, investments, self-employment, and so on.Calculate how much money you made over the past three months, and write down the average amount. This will give you a general estimate of how much money you can anticipate making over the next several months.

A word of advice: now can also be an ideal moment to check that you are paying the appropriate amount of tax. See our guides on tax codes if you need assistance with this matter.

3. Calculate your essential spending



The next step is to make a note of the percentage of your monthly income that goes toward necessary expenditures.

Organize these payments into categories so that you can get a better sense of where your money is going. Your categories might contain things like your mortgage, your electricity bills, your groceries, your child care expenses, and things like travel.

Previous three months
REGULAR INCOME Jan Feb Mar Average
Salary £1,665 £1,665 £1,665 £1,665
Freelance income £150 £50 £200 £133
TOTAL £1,815 £1,715 £1,865 £1,798
Rent £780 £780 £780 £780
Utility bills £299 £278 £303 £293
Groceries £146 £150 £200 £165
Car £200 £180 £170 £183
Gym £25 £25 £25 £25
MONEY SPENT £1,450 £1,413 £1,478 £1,446
MONEY LEFT (DISPOSABLE INCOME) £365 £302 £387 £351

In order to complete this work, you need to look at your bank statements, home bills, and credit card bills. Your budget will be of greater help to you if you take the time to ensure that its data are accurate.

To determine how much money you have left over each month, add up all of your expenses for the previous three months and deduct that amount from your income. This will show you the normal amount of money that is left over at the end of each month for ‘non-essential’ spending, which will form the basis of your disposable income.

4. Review your disposable income

The next step is to add a layer that analyses the way in which you spend the money that is not required for living expenses.

You will be able to avoid going under or over your budget in specific categories if you conduct a thorough analysis of how you have historically spent your discretionary funds.

Take some time to reflect on how you’ve used the money that’s been available to you over the past three months. If you have a savings account, you should also keep track of how much money you put aside on a monthly basis.

Previous three months
REGULAR INCOME Jan Feb Mar Average
Salary £1,665 £1,665 £1,665 £1,665
Freelance income £150 £50 £200 £133
TOTAL £1,815 £1,715 £1,865 £1,798
Rent £780 £780 £780 £780
Utility bills £299 £278 £303 £293
Groceries £146 £150 £200 £165
Car £200 £180 £170 £183
Gym £25 £25 £25 £25
MONEY SPENT £1,450 £1,413 £1,478 £1,446
MONEY LEFT (DISPOSABLE INCOME) £365 £302 £387 £351
Streaming subscription £6 £6 £6 £6
Alcohol £65 £71 £54 £63
Going out/leisure £95 £100 £75 £90
Savings £150 £150 £150 £150
Other £30 £55 £43 £43
DISPOSABLE INCOME SPENT £346 £382 £328 £352
MONTHLY BALANCE +£19 -£80 +£59 -£2

5. Create a spending plan that you will actually follow.

Now that you have a clear picture of your typical spending right at your fingertips, it should not be difficult for you to devise a monthly spending plan that you are able to adhere to.

You may estimate how much discretionary money you’ll have in the months to come by calculating how much you earned on average over the past three months, how much you had to spend on necessities, and then factoring in any one-time expenditures you know are on the way.

From there, you’ll be able to establish a practical budget for your discretionary income and reasonable savings goals that are within your reach.

At this stage, you should probably experiment with the use of a budgeting “rule.” The 50-to-30-to-20 guideline is helpful to a great number of people. It entails allocating fifty percent of your income to the things that are necessary, thirty percent of your income to things that are enjoyable but not essential, and twenty percent of your income to savings.

Previous three months Next month
REGULAR INCOME Jan Feb Mar Average Adjustments Apr
Salary £1,665 £1,665 £1,665 £1,665 +£0 £1,665
Freelance income £150 £50 £200 £133 +£0 £133
TOTAL £1,815 £1,715 £1,865 £1,798 +£0 £1,798
ESSENTIAL SPENDING Jan Feb Mar Average Adjustments Apr
Rent £780 £780 £780 £780 +£0 £780
Utility bills £299 £278 £303 £293 +£0 £293
Groceries £146 £150 £200 £165 +£0 £165
Car £200 £180 £170 £183 +£0 £183
Gym £25 £25 £25 £25 +£0 £25
MONEY SPENT £1,450 £1,413 £1,478 £1,446 +£0 £1,446
MONEY LEFT (DISPOSABLE INCOME) £365 £302 £387 £351 n/a £351
DISPOSABLE INCOME SPENDING Jan Feb Mar Average Adjustments Apr
Streaming subscription £6 £6 £6 £6 +£0 £6
Alcohol £65 £71 £54 £63 -£20 £43
Going out/leisure £95 £100 £75 £90 -£50 £40
Savings £150 £150 £150 £150 +£0 £150
Other £30 £55 £43 £43 -£20 £23
DISPOSABLE INCOME SPENT £346 £382 £328 £352 £262
MONTHLY BALANCE +£19 -£80 +£59 -£2 +£90

In the previous illustration, our budgeter cut their spending on alcoholic beverages, leisure activities, and the category “other” in order to maintain a level of expenditures that was lower than their level of income. It may be tempting to cut back on the amount of money you put into saves, but those funds can come in handy in the event that you have to pay for an unexpected expense, such as an increase in your bills or repairs to your home. When you make a budget, you should not just focus on increasing your disposable income but also on being prepared for unexpected expenses.

A helpful hint: with our article on how to choose the best savings account, you can stay current on the most competitive savings rates currently available.

The best advice for adhering to your financial plan

Financial plan

Financial plan

Once your budget is set, it is unfortunately fairly easy to lose track of it and revert to autopilot once it has been established. The following advice will assist you in maintaining a steady progress toward your monetary objectives.

1. Reduce the amount of money you owe.

If you already owe money, particularly on credit cards, then you should expect that this will be a significant expense that eats into your budget. Because the majority of credit card companies charge standard APRs of up to 19 percent, carrying a balance of even a very little amount on your plastic might end up costing you a considerable lot of money in the long run.

You could save a significant amount of money on interest by switching to a credit card that offers a 0% introductory APR on balance transfers. This would make it possible for you to pay off your debt much quicker. As a result of this, the process of balancing your budget will move forward more quickly.

However, in order to avoid being charged interest at the usual APR on the sum that remains after the introductory period of 0 percent, it is essential to pay off your debt before the end of the promotional term.

2. To save money on your bills, haggle or shop around.

You could try to reduce the cost of critical household goods and services in order to balance your budget or to free up some additional cash if you are aiming to do either of these things. The adjustments that you make are not likely to cause you to experience a sense of deprivation, but they will assist you in maintaining a larger cash reserve.

Don’t just automatically agree to the prices that are quoted for the renewal of your insurance and electricity bills. Do some research to find out what other providers are providing, and try to negotiate with your current provider to see how far it is willing to go to maintain you as a customer by offering you a lower rate.

3. Be ruthless with the money you spend on your leisure time.

If your budget is still unbalanced, it is time to make reductions in spending on items that are not essential. This entails placing a higher priority on the pursuits that provide you with the greatest amount of satisfaction and reducing the amount of money you spend on those that do not provide adequate value for the money spent. Your specific circumstances will determine the extent to which you will need to reduce the amount you spend on entertainment and hobbies.

Spending less on going out and buying new goods is not an easy task; but, if you do not cut down now, you may find yourself in a position that is even more challenging in the future. Keep in mind that if your budget remains unbalanced over the long run, you will eventually wind up with debts that could be quite expensive and could take a very long time to pay off.

4. Find other sources of income whenever you can.

You should think about finding new ways to boost your revenue in addition to making reductions in your expenses.

Make sure that your savings and investments are doing as well as they possibly can if you intend to rely on them to provide a portion of your income. This should be your first and foremost priority.

In addition, if your current working arrangement permits it, you should think about doing some freelance work. Is it possible for you to make a little bit of extra money by working in your spare time by making use of the skills you already have? (If you do end up making money through freelancing, keep in mind that you will be required to file a tax return using the self-assessment method.)

You might also consider renting out your spare room, selling unwanted stuff on internet markets such as eBay, or signing up to rent out your car when it’s not in use to make some extra money.

Even small adjustments to your routine, such as switching from a debit card to a credit card for your day-to-day shopping (and paying back what you spend each month), or making online purchases through a website that offers cash back, might help you produce hundreds of additional pounds each year.

5. Put your money in various jars or accounts to keep it organised.

You should be able to prevent overspending in a single category by allocating a percentage of your monthly income to several categories, such as one for your financial obligations and another for your discretionary expenditure, for example.

If a person does not already have a “spare” checking account, they may decide to start a second current account specifically for this purpose if they do not already have a “spare.” On the other hand, some banking apps, such as Monzo, allow you to create these pots within the same account.

This “piggy banking” or “jam jar” method does require that you keep an eye on numerous sets of bank statements or become familiar with various features of your banking software; however, it is a handy technique for anyone who is prone to losing track of how much money they have left for “fun” each month.

6. Access all of your accounts from a single location.

If you want your budget to remain in a state of equilibrium, one of the most important things you can do is monitor the amount of money that enters and leaves your accounts on a monthly basis.

But this could be a time-consuming process if you have a number of different bank accounts and credit cards that you need to keep track of.

Apps that are compatible with open banking can make personal finance management easier for some people. Apps for open banking budgeting are helpful for obtaining an overview of several bank accounts and credit cards in a single location.

7. Reexamine your financial plan on a regular basis.

In conclusion, the most important thing you can do to successfully manage your budget is to make sure you review it on a consistent basis and make any necessary adjustments. Your budget will need to be revised as your life experiences bring up new challenges and opportunities.

We strongly advise going back over your budget on a monthly basis. If you consistently spend more than you have, you will notice this immediately and be able to make adjustments to your spending habits before it has a significant impact on your ability to achieve your financial goals.

If you earn a raise in pay or a promotion, you need to reevaluate your financial plan. If you fail to take into account an increase in your salary when creating your budget, you run the risk of spending the extra money haphazardly and not getting the most out of the chance it presents to somewhat release your financial grip on your finances.

Check to see whether there is room in your budget to handle any changes in your circumstances that may have an effect on your financial condition whenever there is a shift in these circumstances.

Get debt help if your budget won’t add up

It is imperative that you get assistance as soon as possible if you are still having trouble achieving financial stability even after reducing the amount of money you are spending and are anxious about the amount of money you owe. Spending more money than you bring in every month is not only unsustainable over the course of time, but it will also get you deeper into debt.

There are organisations that provide free debt assistance and will assist you in evaluating your circumstances and formulating a strategy for dealing with your obligations. For additional information on how to get out from under financial obligations, read our guide on how to pay off your debts and contacts for free debt assistance.

Avoid using commercial debt management companies at all costs, as they will charge you a fee for services that you could receive for free from nonprofit organisations like StepChange Debt Charity (previously known as the CCCS), National Debtline, or Citizens Advice. Our specialists will always recommend staying away from such businesses.