How to create an effective monthly spending budget

Why create a monthly budget?

Creating a budget can help you stay in control of your finances. You can use it to monitor what you’re spending where and ensure you have enough money set aside to meet essential payments, such as your mortgage, rent or other household bills.

A well-judged budget will help you determine whether you’re spending more than you’re earning and indicate where you can make savings if necessary. It can also help you work towards savings goals.

How to create a monthly budget

Before drawing up your monthly budget, you need to gather your bank statements, payslips, receipts and bills together to have something to work from. Then follow the steps below:

1. Work out your income

Your first step is to make a note of your monthly income. This should include:

• Your take-home pay (salary minus tax and other stoppages, like national insurance and pension contributions)

• Any benefits you get, such as Jobseeker’s Allowance, Universal Credit, Income Support

• Pension income

If you have any income that’s paid weekly, multiply it by 52 (the number of weeks in a year) and divide by 12 to get a monthly figure.

2. Work out your outgoings

Next, work out what you spend each month. This should include:

• Your mortgage or rent

• Household bills, including energy, broadband, council tax, water

• Food bills

• Expenses such as home insurance, car insurance, life insurance and pension contributions

• Debt repayments

• Money spent on travel 

• Money spent on socialising, clothing, toiletries, etc

It’s also important to consider how much you spend each year on birthdays, Christmas and holidays. You can divide this figure by 12 to give you a monthly cost. 

3. Subtract your outgoings from your income

Subtract your outgoings from your income to see whether you’re spending more than you have coming in each month. If you are, you need to find ways to make cutbacks to reduce your spending. 

How to manage any overspending

If you’re overspending, look at the following areas to see where you could save money:

• Switch to a cheaper deal: Consider your broadband, car insurance, home insurance and mobile phone bill. Could you save by switching to a better deal? It’s best to check if you’re out of contract or wait for renewal time first.

• Review your debts: Consider whether you could move your credit card debt to a 0% balance transfer credit card and pay no interest for several months. Or, if your credit score has improved since taking out a personal loan, you could apply for a new, cheaper loan and use that to pay off your existing loan. Check whether there are any early repayment fees to pay first.

• Save at the supermarket: Think about switching to a cheaper supermarket, buying in bulk, batch cooking and eating less meat to reduce your food bill.

• Make cutbacks: Review your subscriptions and consider whether you still need them. Maybe you could cancel your Netflix subscription or quit the gym. Also, consider how much you spend on eating out, your daily coffee habits, and socialising to see if you could reduce your spending.

• Sell unwanted items: Use websites such as Vinted and eBay to get rid of unwanted clothes and other items and earn extra cash. You might not get a huge sum for each item, but make it a habit, and it will add up over time.

Choosing a budgeting plan

There are several budgeting methods you could use to help you get better at managing your finances. Which one you choose will depend on your preferences, but some of your options include:

50/30/20 budget

With this method, you divide your monthly income into three spending categories as follows:

• 50% on essential spending (such as bills)

• 30% on wants or personal spending

• 20% on savings to help you build up a savings pot

Envelope system budget

Here, you label envelopes with specific categories, such as rent, travel and food, and then fill each envelope with the amount of cash you plan to spend on each one each month. 

If you don’t use cash, you can use mobile banking apps (like HyperJar and Starling Bank) to set aside money in different ‘pots’ to help you budget.

Reverse budgeting

With this method, you focus on your savings goals first. This means setting aside the amount you want to save and then adjusting your spending depending on what’s left.

How can you stick to your budget?

Once you’ve created your budget, it’s important to stick to it. The following tips can help you to do this:

1. Set realistic goals

First, make sure your goals are realistic. If they are unachievable, you’ll quickly lose focus. Setting both short-term and long-term goals can help you stay motivated. 

Short-term goals might include paying off your credit card debt or setting up an emergency savings fund. Long-term goals could involve saving more into your pension or paying into a Junior ISA for your child.

2. Automate bills and savings

Setting up Direct Debits and standing orders will help you pay bills and other debts on time, avoiding late payment fees and extra interest charges.

If you can afford to, it’s also worth setting up a standing order to move money from your bank account to your savings account each month. Automating your savings in this way ensures there’s no temptation to spend money you should be saving, helping you to achieve your goals faster.

Choosing an instant-access savings account means you can access your money quickly. But you could earn a higher rate of interest with a fixed-rate bond. 

3. Regularly review your budget

It’s important to review your budget regularly and make any necessary adjustments. Priorities and goals can change, or you might get a pay rise at work or clear some of your debts, leaving you with more disposable income. Whatever the circumstances, it’s sensible to revisit your budget regularly and make sure it’s still working for you.