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How to create and manage a personal budget effectively

How to create and manage a personal budget effectively

Secured Loans > Help & Advice > Managing your money > How to create and manage a budget

How to create and manage a personal budget effectively

It’s easy to feel like your finances are out of control without a clear idea of what money is coming in and where it’s going. That’s where budgeting comes in. It’s one of the first and most important steps in learning how to manage your money better.

Below, we’ll explore step by step how to create a budget from scratch and offer practical tips on making it stick. But first, here’s a quick summary of why to bother with budgeting in the first place.

Why is budgeting important?

The word ‘budget’ might conjure images of sad spreadsheets and cutting back on the things you enjoy. But in reality, having a solid budget can help you make everyday decisions with more confidence. It also allows you to better plan for your future and the things you want in it.

There are two basic stages to it. Firstly, you can check you’re not spending more than you’re earning to avoid getting into long-term problems with debt. Then once you know where your money’s going, you can prioritise what you do with it based on what matters to you.

How to make a monthly budget

While every budget is personal, you’ll still need to follow the same key steps to make one. It helps to have things like bank statements, payslips, receipts and bills ready to go.

1. Calculate your income

First up is working out what money you’ve got coming in. You’ll need to look at:

  • Your take-home pay (your salary minus tax and any other deductions such as national insurance, pension contributions, student loan repayments and private health insurance – you’ll find this figure on your payslip)
  • Any benefits you receive, such as  or Universal Credit
  • Pension income

If you have income that’s paid weekly, you can turn it into a monthly figure by:

  • Multiplying it by 52 (the number of weeks in a year)
  • Dividing it by 12 (the number of months in a year)

If you’re self-employed and your pay varies, you’ll need to take an average or rough range that your income usually falls into. Make sure to calculate and subtract the income tax & National Insurance you expect to pay annually as a monthly figure, too.

2. Track your spending

Next is the interesting part if you’ve not had a budget before – finding out exactly where your money’s going. Check your bank statements or mobile banking app and record how much you spend on categories such as:

  • Mortgage or rent
  • Household bills including energy, broadband, council tax, mobile phones and water
  • Food and drink
  • Financial costs such as insurance and debt repayments
  • Travel including public transport, fuel costs and vehicle services
  • Leisure including shopping, socialising, subscriptions and other entertainment

Life is rarely the same from one month to the next, so looking at three months’ worth of spending may give you a more realistic picture than one month alone.

Try to account for one-off or infrequent costs too, such as birthdays, Christmas, holidays, car repairs and vet’s bills. You can divide their yearly cost by 12 to find a monthly figure.

3. Combine the two

Steps one and two should have given you two totals to work with. Finally, you can subtract your spending from your income to see if you’re living within your means each month.

Whether you’re coming up short or have money left over can guide your next moves.

How to manage your money once you've got a budget

Tweak your spending

Creating your budget is likely to show you opportunities to save money in different areas. This is especially helpful if you’re overspending – and, if you’re not, it’s still handy for increasing your savings.

  • For example, you could decide to:
  • Plan and cook more meals at home
  • Walk or cycle more instead of using public transport or taxis
  • Buy fewer clothes or gadgets (or shop second-hand)
  • Cancel subscriptions you don’t use much
  • See if you can switch to cheaper deals for things like broadband, your mobile phone, insurance or energy

Increase your income

On the flipside, there could be ways to increase what you have coming in. Earning more can be easier said than done, of course, but you may be able to:

  • Apply for a higher-paid job
  • Go for a promotion or pay rise, perhaps by taking on extra responsibilities or growing your skills
  • Take on a side hustle such as freelancing, delivering food or tutoring*
  • Sell some of your possessions on online marketplaces like eBay, Depop or Facebook*

*these may have income tax implications if your increased earnings take you into a higher tax band or you earn more than the £1,000 tax-free trading allowance

Choose a budgeting system

With your spending more in check, there are lots of methods that can sticking to your budget easier. Popular options include the 50/30/20 and envelope systems.

The 50/30/20 budget

This method divides your monthly income into three key categories:

  • 50% for essential spending (e.g. rent/mortgage, bills, debt repayments and basic food shops)
  • 30% for personal spending (like meals out, socialising and holidays)
  • 20% for savings (for emergencies, paying off debt, home improvements, etc. – more on what to do with savings in the tips section below)

This way, you’re spreading money sensibly across your must-haves, nice-to-haves and hope-to-haves in the future. You might need to tweak the percentages to make it work for you.

The envelope system

This system involves labelling envelopes with categories such as rent/mortgage, travel and food, and physically dividing your income by what you plan to spend on each one.

It’s been around for a while but don’t worry if you don’t use much cash. You can do the same thing using what are often called ‘pots’ in mobile banking apps. The idea is that, once an envelope or pot is empty, you can’t spend any more money in that category until the next month.

5 bonus tips on how to manage a budget effectively

Prioritise paying off debt

If you have expensive debts such as overdrafts or high-interest credit cards, it’s wise to try and clear them as early as possible. Prioritising debt repayments can reduce how much you pay in interest overall.

Alternatively, if you’re behind on payments such as your rent or mortgage, getting them back up to date will save you from getting into further problems.

Build an emergency fund

Life can throw up challenges sometimes and having emergency savings can help you deal with unexpected costs. For example, would you be able to cope if your boiler or car broke down tomorrow and you needed professional help to fix it?

Experts recommend saving enough money to cover at least three months of outgoings without having to borrow.

Set financial goals

Financial goals can give your budget purpose. Whether that’s clearing debt, enjoying a holiday or building a house deposit, specific targets may help you work towards the things that matter most.

Think about what you want in life and break them down into manageable steps. For example, you might aim to save £100 a month for five months to pay for a new laptop. Read our guide on how to set a savings goal  for more tips on this.

Automate bills and savings

Why have the hassle of paying your bills manually each month when you can automate them? Setting up Direct Debits or standing orders will make sure you pay the right amount on time, helping you avoid late payment fees and protect your credit score.

If you can afford to, set up an automatic transfer into a savings account, too, so you can build it up in the background. Pick a date just after payday so you’re not tempted to spend potential savings elsewhere.

Review your budget regularly

Don’t let your budget be a one-off thing that you forget about. Keep an eye on your everyday spending to see how you’re doing at a glance. You can do bigger checks at the end of each month to see if you’re sticking to the plan.

Regularly reviewing your budget can help you keep it realistic and spot where you need to make adjustments. That could mean saving more thanks to a pay rise, for example, or reducing your spending in one area because of increased outgoings in another.

How to manage your money better with Evolution Money

Budgeting can make your life easier in lots of ways. If clearing multiple debts is part of your plan, you might want to consider one of our debt consolidation loans. You could turn multiple high-cost debts into one more manageable monthly repayment that’s easier to budget for.

We offer homeowner loans from £5,000 to £100,000 – plus, we’re FCA-regulated and have lots of great customer reviews on the independent platform feefo. If you think we could help to balance your budget, check your eligibility in a few clicks today.

Visit our help hub for more guides like this one on managing your money.

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