How to Make A Good Budget

Budgets can be tricky to make and hard to stick to. So how can you make a budget to suit you?  

You’ll first need to understand your financial habits and goals. Where do you spend your most of your money? What are you saving towards – for example, an emergency fund or a mortgage deposit?  

Once you know, you’ll be able to make a financial plan that you can follow - because it’s based on you, your habits, and your goals!  

So how to begin? These are some of the budgeting methods we recommend.  

Method One: Saving and Spending Within Your Salary 

Who it’s for: those who don’t know where their money goes and want to put it to better use. 

1. Ask yourself why you are making a budget. Is your spending out of control? Do you need to start saving money towards a big goal, but struggle to put money aside? Or do you want to understand your money habits, which is the first step to making accurate, you-based choices? Make a note of this goal and come back to it.

Make your goal specific. Instead of “save more money” be sure to add a figure and a timescale. You’re far more likely to reach your goal if it is defined.  

2. Write down your income. Be sure you have factored in tax, which is automatically deducted from your paycheque each month.

If your income changes every month then make two budgets based on the lowest you expect to earn and the highest amount you expect to earn in a month. This could be your contracted pay and your contracted pay plus commission, or overtime.  

3. List your reoccurring monthly bills such as rent/mortgage, gas, electric, water, and council tax. These are the essential bills you must pay on time. If you struggle to keep up with these payments, then get in touch with your providers straight away to discuss how they can help you.

If you suspect that you might fall behind on these bills, it can be helpful to contact your provider and to let them know that you are experiencing financial hardship. Your provider may accept smaller payments in the short term so long as the remaining amount is paid later.  

4. List your subscriptions – TV licence, broadband, mobile phones, Netflix, Amazon Prime, etc. These are the non-essential reoccurring bills which, if things were very tight you may be able to suspend these services.

Subscription services like entertainment streaming services or a magazine series can be cancelled with little effort and restarted again easily when you can afford them. Some of these services won’t be so easy to cancel but may allow you to switch to a cheaper plan instead: or, the provider may accept smaller payments in the short term so long as the remaining amount is paid later. 

5. How much do you have after your bills? This remaining money will be for your food, leisure costs, traveling, gifts, and savings. This spending may change because its paying towards your daily, changeable life. One month could contain a lot of birthdays while another month involved more travelling. We suggest returning to your original goal which you made in step 1. Your goal will reveal what you want to do with the information you’ve gathered: having understood where your money currently goes, you can make better decisions about where you want it to go instead.

If possible, pay your bills on payday and then put some of the remaining money into savings too. The rest is for spending that month. This is a great way to get started towards your goal. 

What if you do not have any money remaining after your essential bills have been paid? This is when you ought to investigate spending less on essential bills, such as moving into a cheaper property or changing service provider.

Alternatively, if you cannot spend less you can work to earn more. This could be by changing job, seeking a promotion, or picking up more hours – or even a side hustle like selling crafts, or tutoring.

However, opening a loan in order to sustain your lifestyle with no plan to pay the loan back is a bad idea. Instead, know where you can turn for help.  

Sticking to the budget 

Give your budget some leeway. Build into your plan an amount of money that can be used for one-off and hard-to-predict purposes – like buying household cleaning products on a one-off, or a birthday cake. Or, if you really must, that forbidden takeaway or taxi ride. This way you can avoid the reaction that many budgeters have: the I’ve failed at my budget so I might as well spend loads more. Give yourself room for these expenditures so they don’t feel like budget-breaking failures.

Don’t plan to cut out purchase groups entirely – or at least, not straight away. If you typically buy plenty of coffees or scratch cards and want to spend less (or nothing) on these going forwards, then work on reducing that spending first. To assume you can completely change all your spending habits overnight can lead to disappointment. Instead, set mini goals – to buy only two lattes in a month, then one, then none.  

Reintroduce cash into your life: spend what you have on you and avoid the plastic for any small, frequent purchases like groceries or nights out. You can go a step further with the envelope method.

Envelope Method

Separate your cash into envelopes for each category of spending. Think of categories like Food, Fun, and Misc. This instantly creates a self-imposed cash allowance each week to spend on lunches, coffees, drinks out, clothes, and so on. The idea is that you spend what you’ve decided to spend and no more; when you run low, you have to stop spending.  

Take a look at our budgeting apps guide. From withholding your money until your bills are due to sending you notifications with budget updates, these apps can be a fantastic support to succeeding in your budget. They work through open banking, meaning they can see your transactions list if you let them. This means that these apps can do the work of updating your budget as you spend money, adding up and subtracting what you’ve spent and what you have left.

Budgeting apps are a great choice for those who don’t want to scrutinise their receipts or bank statements to understand their money habits.

However, some applications are easier to use than others, and some of the graphs they show might not be helpful for the way you spend or understand spending. We recommend trialling two or three budgeting apps before deciding which is best for you. 

Method Two: Strategically Frugal 

Who it’s for: People with no emergency funds who want to build one quick. 

It could be that you want to wean yourself off payday loans, dipping into savings, or borrowing from friends. It could be that you have had experience of sudden financial emergencies and had no cash to deal with them – and don’t want to be in that situation again.  

This method is the quickest way to build up savings or an emergency fund but it isn’t for everyone.  

1. When your next paycheque comes in, make sure half of it (or more) goes into savings immediately. This is the start of your emergency fund. It can also be the start of a house deposit – depending on how often you repeat this cycle.

Set up a standing order for the amount you want to save each month and place this into a savings account. If you don’t have an instant access savings account, you can speak with your bank to open one.  

2. Pay your bills – such as rent/mortgage, gas, electric, water, council tax, and any other services. Do this as soon as possible after payday and setting money aside into a savings account.  

3. Live frugally on the rest. One month of no take outs, all packed lunches, and no pints. Make sure to eat the food that’s already in the house, resist the sales, and grocery shop with a list in hand. Just for one month, keep your spending as low as possible.

4. By the end of the month, you’ll have saved up a considerable sum of money! Now that you’ve got the ball rolling, you can repeat the process either exactly or (with a bit more spending money) put less than half your paycheque into the emergency pot next time.  

While it’s recommended that everyone try to squirrel away three months of income (just in case of a job loss or a financial emergency like needing car repairs), any amount can help. 

Be sure that this emergency pot of money is easy to access and don’t be tempted to spend it on a non-essential occasion like on a holiday.