How To Plan A Budget

Mon, 30/01/2012 - 14:07 -- nick

Planning your budget: a step-by-step guide
What’s a budget and why do I need one?
A budget is a spending plan that takes into account your monthly income and expenditure, so that you have a clear idea of where your cash goes. 
If you have a financial goal – such as ridding yourself of debt, saving up for a deposit on your first home or putting money aside for your retirement – a budget plan will help you work towards this.
Provided you stick to it, a budget will help you to keep on top of your outgoings, making sure you don’t spend more than you earn each month and helping you to live within your means.
It’s important to revisit your budget on a regular basis – particularly if your employment or living situation changes – or you could find that it no longer works for you.
Making sure your budget reflects your every day expenses and income as closely as possible means you’re more likely to follow it, balancing your earnings and spending effectively.
1. Get organised and take your time
It’s a good idea to set aside at least an hour before you begin trying to draw up your budget. Doing it in a rush is likely to mean you make mistakes. Also, it makes sense to gather together all the paperwork you’ll need before getting started – so get hold of:

  • a few months’ worth of bank statements;
  • your recent credit card bills;
  • copies of your household bills;
  • details of your savings and pension contributions;
  • information on any other incomes you may have.

2. Add up your income
Next, you need to calculate your income. Make a list of your regular earnings from employment (after tax and National Insurance has been deducted), as well as any income you have from savings, investments, self-employment or the rental of any properties you own.
Make sure you don’t focus only on monthly incomes. If you have weekly, yearly or sporadic earnings such as dividends from shares, be careful to add these.
Whether you’re using a spreadsheet, a notebook or a specially-designed computer programme to create your budget, make sure you separate your annual/irregular and monthly earnings into two or more columns. Once you’ve done this, calculate overall totals for each income ‘stream’, as well as a grand ‘yearly earnings’ figure.
Now might also be a good time to ensure you’re paying the correct amount of tax. For help with this, see the Which? Tax codes explained advice guide and other useful articles in our Tax section.
3. Work out how much you’re spending
Now you need to work out how much you’re spending each month. Look at your bank statements, household bills and credit card bills to ensure you have a realistic idea of where your cash is going – and avoid guessing wherever possible, as the more accurate your figures are, the more useful you’ll find the budget you draw up.
Remember to take into account occasional spending, not just monthly expenditures. Think about the cost of Christmas, birthdays, insurance policies, your MOT and your annual holiday. Add costs like these into your list of expenses – ideally in a separate ‘yearly/occasional outgoings’ column.
Once you’re sure you’ve included everything you need to, add up your monthly and occasional spending separately so you end up with two totals.
Next, calculate an overall figure that incorporates all your yearly expenditure. If you divide this number by 12 and look at the difference between your result and your ‘regular spending’ total, you’ll see how much money you need to earmark each month for ‘irregular’ spending on things like car insurance and gifts.
4. Compare what’s coming in and going out
Now it’s time to look at your income and spending totals alongside one another.
Take your annual and monthly expenditure totals away from your annual and monthly income figures.
What you’re left with will be the yearly and monthly surpluses – or shortfalls – in your finances. A shortfall will be indicated by a negative number.
Even if you find you have more money coming in than going out, it’s still a good idea to draw up a budget plan. Making a budget will allow you to ensure you keep spending sensibly, and could help you find extra opportunities to save for the future or pay off debts more quickly.
Meanwhile, if you discover you’re spending more than you earn at the moment, making a budget is a crucial task you shouldn’t put off.
If your expenditure regularly exceeds your income, you’ll drift into debt – and if you don’t address the situation, you could find yourself in a downward financial spiral it’s difficult to escape.
Our Five top tips for balancing your budget, on the next page of this guide, should help you if you’re over-spending. The Which? How to deal with debt advice guide also offers tips for anyone worried about what they owe.
5. Draw up a budget you can stick to
Whatever your financial goals, now is the time to draw up a plan that will help you achieve them.
Be as realistic as possible when planning your budget. It should consist of what you intend to spend each month, and in some cases each year, on key things – but remember there are certain costs that will be impossible or very difficult to cut, while others will be easier to tweak.
Small changes such as not buying a takeaway coffee every day could make a big difference to your budget over the long-term.
Meanwhile, changes to your lifestyle that you’ll barely notice – such as switching your current account, credit card provider or energy deal – could help to balance your budget without the need for cut-backs. You can find more ideas like these on the next page of this guide.
Once you’ve drawn up your budget, it’s important to keep an eye on how faithfully you’re sticking to it – particularly in the first few months.
If you find your budget isn’t working for you, check out our tips for Managing your budget successfully, which you’ll find further on in this advice guide.
Five top tips for balancing your budget
1. Boost your budget by saving on essentials
If your budget doesn’t balance or you’re looking to free up some extra cash, the first thing you should do is try to cut the cost of essential household goods and services. The changes you make aren’t likely to make you feel deprived – but they will help to keep more cash in your pocket.
Cut your energy costs
If you’ve never switched energy suppliers, for example, you could save hundreds of pounds a year by doing so. Gas and electricity companies rarely offer loyal customers the best deals, so there’s every reason to check whether a different supplier could offer you cheaper energy.
You may also be able to cut costs further by opting for an online tariff (paperless billing) and choosing to pay for your gas and electricity by direct debit. Visit the Which? Switch? website for more information and to check which energy tariff will be cheapest for you.
Find cheaper car and home insurance
Meanwhile, don’t just accept the renewal quotes you receive for insurance products such as car insurance and home insurance. By sticking with the same insurer year after year, you’ll miss out on the best deals – which are typically only available to new customers.
More money saving tips
There are many other ways you can cut day-to-day costs without cutting back – from saving money at the supermarket to driving down the amount of money you spend on motoring. Spend some time on the Bills and budgeting section of our website to get more inspiration.
2. Cut the cost of your debts
If you have existing debts – particularly on credit cards – these are likely to be an expensive drain on your budget. With most credit card providers charging typical APRs of up to 19%, owing even a modest amount on your plastic could cost a significant sum in the long run.
However, taking out a new 0% balance transfer card or a Life of balance transfer card could cut your interest costs dramatically, allowing you to pay off your debt more quickly. In turn, this will speed up the process of balancing your budget.
If you’re thinking of applying for a loan to consolidate existing debts, you should ensure you have a plan to pay off what you owe. Sometimes people who try to bring all their borrowing together in one place continue using their credit cards, ending up in a far worse situation than before.
For advice on all aspects of borrowing, including the best and worst ways to borrow, read the Finding the best ways to borrow advice guide. Our Credit cards review also contains a round-up of the very best deals on the market, to help you find one that will suit you. 
3. Assess the 'extra spending' in your budget
If your budget still doesn’t balance, it’s time to cut back on non-essential spending. This means prioritising the activities you get most enjoyment out of, and spending less on those that aren’t offering you good value for money. How far you have to cut back your ‘for fun’ spending will depend on your personal situation.
Spending less on going out and buying new things isn’t easy – but not cutting back now might mean you’re in an even more difficult position later. Remember, if your budget is out of balance in the long-term you’ll end up with debts that could be expensive and may take a long time to clear.
Following money savings tips like those you’ll find on our Bills and budgeting pages could help you track down special offers, find discounts and cut the cost of having fun – helping you to save money at the same time as enjoying yourself.
4. Generate extra cash where you can
Alternatively – or to complement cut-backs in your spending – you could consider new ways to increase your income.
First and foremost, if you have savings and investments that you’re relying upon to generate part of your income, make sure they are performing as well as possible. Use the Which? Savings booster tool to find out how much extra interest you could be earning on your cash.
In addition, consider freelance work if your employment contract allows it. Are there ways you could use your skills to generate a little extra income by working in your spare time? (Don’t forget that if you do earn money through freelancing, you’ll need to fill in a Self Assessment tax return.)
You could also sell unwanted items via eBay, could consider renting out your spare room or could even sign up to rent out your car when it isn’t in use, via a website such as Whipcar.
Even simple changes to your routine, such as using a cashback credit card instead of your debit card for everyday spending, or making online purchases via a cashback website, could help you generate hundreds of pounds extra each year.
5. Get debt help if your budget won't add up
If you’re still struggling to balance your budget after cutting back on spending and are concerned about the amount of money you owe, it’s important to seek help as soon as possible. Spending more than you earn each month isn’t sustainable in the long-term, and will push you further and further into debt.
There are free debt advisory services that will help you assess your situation and come up with a plan for dealing with your debts. Read the Which? How to deal with debt advice guide for more information, and the contact details of debt help organisations we recommend.
Our experts would always advise steering clear of commercial debt management companies, who will charge you a fee for the same services you could get free from charities such as the Consumer Credit Counselling Service, National Debtline or Citizens Advice.
How to manage your budget successfully
Making a budget can be quite a satisfying process. After drawing one up, you’ll probably feel proud – and a little relieved - that you’ve seized control of your finances.
However, drawing up your budget isn’t the most important task when it comes to managing your money successfully; the key to effective budgeting is sticking to the spending plan you’ve made.
So, here are our experts’ top tips for managing your budget successfully.
1. Use several bank accounts to help you budget
If you’re one of the many people in Britain with more than one bank account, using several alongside one another could help you stay in control of your spending.
Dividing up your income each month and depositing portions into separate accounts – perhaps one for bills and another for spending on yourself – should help you avoid over-spending in a single area.
Some people may even choose to open up a second current account specifically for this purpose, if they don’t already have a ‘spare’.
Although it’s a useful technique for anyone prone to losing track of how much money they have left for ‘fun’ each month, this ‘piggy banking’ method does mean keeping your eye on several sets of bank statements.
Therefore, you’ll need to be organised and stay on top of the extra paperwork it might generate.
2. Check your bank statements and bills carefully
Keeping an eye on what money you have flowing into, and out of, your accounts each month is crucial if you’re keen for your budget to stay balanced.
Whether you receive your regular bank statements and bills through the post or online, make sure you check them to ensure that important transactions have been processed correctly – and to make sure that no suspicious spending is showing on your account.
Reviewing your spending on a monthly basis will highlight where you might be overdoing it, and should inspire you to cut back immediately if necessary.
Going through your bills and statements properly also means you’re likely to pick up any problems as they arise. For example, you’ll spot fraudulent activity on your accounts sooner rather than later, should this occur.
3. Consider keeping a spending diary
Making a note of all your spending for a few weeks is another way to check that your money really is going where you’d like it to.
It may seem tiresome to write everything down, but if you tend to spend using cash rather than a debit or credit card, you won’t be able to track where your money is going simply from looking at your bank statements and bills.
In addition, many people find that keeping a spending diary tends to concentrate their minds on what they’re spending. Somehow, knowing you’ll need to write it down can act as a disincentive if you’re about to splurge on something you could maybe live without!
4. Regularly reassess your budget
Finally, the key to managing your budget successfully is to ensure you revisit it – and revise it – on a regular basis. As your personal circumstances change, your budget will need to be amended, too.
Getting a promotion or pay rise should mean you re-work your budget. While it may seem like an opportunity to loosen up your purse strings slightly, failing to take account of an income rise in your budget could mean you spend it indiscriminately and don’t truly make the most of it.
Each time there’s a change in your situation that will have an impact on your finances, be sure to look at how your budget can accommodate this.
If a change means you’re going to have less money coming in than you’re used to, be sure to check out our Top tips for balancing your budget. You’ll find them on the previous page of this guide.
Useful budgeting tools and resources
While some people might prefer to use pen and paper to create their budget, others will want to take a more technical approach to tracking their spending.
Luckily, there are plenty of resources available for those people who’d like to use a computer-based or online system to help them budget effectively – many of which are free to use.
Personal finance software
Personal finance (PF) software programmes can be loaded on to your home computer or laptop and can have a wide variety of functions.
Depending on the system you choose, your PF software will allow you to produce a monthly budget, create diagrams and graphs to illustrate how you’re spending your money and will allow you to track the status of your bank accounts, savings and investments.
Some personal finance software packages cost up to £50, but there are also free computer programmes available to help you manage your money.
Read the Which? review of the best paid-for and free personal finance software to make sure you get the right package for your needs.
Money dashboards and account aggregation services
Online money dashboards and account aggregation services are also growing in popularity in the UK – albeit fairly slowly.
Websites such as, MoneyDashboard and First Direct’s aggregator service allow you to view all your credit card, current account and savings account balances in one place – so there is no need for you to log into several different sites (or dig out various sets of statements and bills) every time you want to check whether your spending is under control.
Some aggregators offer additional functionality, such as the automatic production of graphs and diagrams based on the transactions you make using the accounts linked to your dashboard. These can illustrate your financial situation and spending habits, without the need for you to provide the website with additional information.
You can find out more about account aggregators, as well as their pros and cons, by visiting the Bank account dashboards page of our Personal finance software review.
Online and downloadable budget planners
Finally, you might want to consider using an online budgeting tool, or a downloadable budget planner, to help you create a monthly spending plan you can keep track of. Some of these offer you the facility to save your budget details or create a personal ‘account’ – but they won’t require you to provide your bank details or passwords.
The free budgeting tool from the Consumer Financial Education Body is straightforward and easy to use, and does a lot of the calculations you’ll need worked out for you.
Meanwhile, ListenToTaxMan is a useful website for anyone who needs help working out their total annual income after tax.
Read more: Consumer Champions Which? Under Creative Commons License: Attribution Non-Commercial