Budgeting often sounds like a chore, but having a clear plan for your finances can make life a whole lot easier. Whether you’re saving for a big goal or just trying to keep your spending in check, a realistic budget is key to staying on track. Here’s how to create a budget that works for your lifestyle and financial goals.
1. Understand your income
Before setting a budget, you need a clear picture of how much money you actually have coming in. This includes your salary, freelance income, government payments, or any side hustles. Be sure to use your after-tax income so you’re working with your real take-home pay.
2. Track your expenses
To build an effective budget, you first need to know where your money is going. Spend a month tracking your spending to identify your fixed costs (like rent, mortgage, and utilities) and variable costs (like groceries, entertainment, and dining out).
3. Categorise your expenses
Group your expenses into categories such as:
- Essentials: Rent/mortgage, utilities, groceries, insurance, and transport.
- Savings and investments: Emergency fund contributions, investment accounts or holidays.
- Lifestyle and entertainment: Dining out, hobbies, gym memberships, or subscriptions.
- Debt repayments: Credit card payments, loans, or buy-now-pay-later commitments.
This step helps you understand which areas may need adjustments.
4. Set realistic limits
Once you know what you’re spending, set realistic limits for each category. Popular budgeting methods can help guide you:
- The 50:30:20 rule: Allocate 50% of your income to essentials, 30% to lifestyle and entertainment, and 20% to savings and debt repayments. This simple structure can make budgeting easier to manage.
- The bucketing method: Divide your money into separate ‘buckets’ for different spending areas. For example, you could have one sub account for bills, another for savings, and one for spending money. This method can help you visualise where your money is going and prevent overspending.
Choose a method that suits your lifestyle and financial goals.
5. Identify areas to cut back
If you find you’re overspending, look for practical ways to reduce costs. Could you switch to a cheaper phone plan? Are there subscriptions you no longer use? Small changes can add up to significant savings.
6. Build an emergency buffer
Life is unpredictable, so aim to set aside some money for unexpected costs like car repairs or medical bills. Start small and make it a priority to contribute regularly.
7. Plan for irregular expenses
Annual expenses like car registration, insurance premiums, or holiday spending can derail your budget if you’re not prepared. Create a separate savings account for these costs and add to each time you get paid.
8. Automate where possible
Automating bill payments and savings transfers helps ensure you stay on track without having to think about it. Set up automatic transfers for savings as soon as you get paid to make you’re your money is allocated in line with your financial goals.
9. Be flexible and review regularly
Life circumstances change, so your budget should too. Revisit your budget every few months to check if it’s still realistic. If you receive a pay rise, have a change in expenses, or want to reach new savings goals, make sure you adjust it accordingly.
10. Celebrate progress
Budgeting doesn’t have to mean living a life of restriction. Set milestones for yourself and celebrate when you reach them, whether it’s paying off a credit card or reaching your savings goal. Rewarding yourself (within reason) helps you stay motivated.
Creating a realistic budget isn’t about cutting out everything you enjoy – it’s about being mindful of where your money goes and ensuring your spending aligns with your goals. By following these steps, using proven budgeting techniques, and maintaining some flexibility, you’ll be well on your way to managing your finances with confidence.
This information provides general advice only. We do not provide advice based on any consideration of your personal objectives, needs or circumstances.
