What is budgeting?
Put simply, budgeting is the process of creating a plan for how you’re going to use your money. There are several ways you can budget, and the format you choose will depend on your priorities and financial goals.
If you’re unsure where to start with budgeting, here are some simple steps you can follow.
Determine your financial goals
Before you begin creating your budget, it’s important to figure out your financial goals. Are you saving for a specific purchase? Trying to pay off debt? Aiming to build an emergency fund?
Establishing your goals early on in the process will help to guide your budgeting decisions, including which format you choose to use.
Make a note of your income
If you get paid on a regular basis (for example, monthly), make a note of the amount you earn in each paycheck. If you’re self-employed or your wages tend to fluctuate, consider calculating your average income for the past three to six months.
List your monthly expenses
Once you’ve established your income, the next step in the process is to list your regular monthly expenses. Some common examples include:
- Rent or mortgage payments
- Loan payments (for example, a student loan)
- Utilities (such as electricity, water and gas)
- Groceries
- A mobile phone contract
- Childcare costs
- Travel expenses
- Gym memberships
To help you write this list, take a look at your bank and credit card statements from the last three to six months. This will give you an idea of your typical monthly outgoings.
You may also want to consider grouping your list into categories (for example, essentials and non-essentials) to help you understand where your money is going and how you can better manage it.
Decide your budgeting format
There are many budgeting formats available, so it’s really a case of choosing the one that works best for you and your goals.
We live in a world of technology, and budgeting is no different. Today you can download apps that collate all of your expenses in one place. This means you get a full overview of what is going on with your finances.
If you’re adept with Excel and want a more customisable option, websites like Money Saving Expert provide budgeting spreadsheet examples. This option gives you a broader range of graphics that you can use to display your finances.
While an app or Excel template can be a great budgeting resource, a notebook and pen can work too. Whichever option you choose, make sure it’s something you can keep track of and easily update.
Stick to your budget
Creating a budget is perhaps the easiest part of the process – sticking to it may be a little more difficult. Here are some tips to help you stay on track:
- Set realistic goals – While it may sound simple, making sure your goals are actually achievable can help you stay motivated when budgeting. If your goals are unrealistic, you may find it hard to stay consistent.
- Plan for the future – Life doesn’t always go to plan, so it’s important to set aside an additional pot of savings that can act as a financial cushion. This might be an emergency fund for unplanned expenses or pre-planning for any larger bills that are coming up.
- Budget flexibly – As your life and expenses change over time, you may need to adapt your plan. If you’ve budgeted too strictly, the smallest change can have a big impact on your finances.
- Review your progress – Budgeting doesn’t always feel like the most exciting task, which is why it’s a good idea to regularly review your progress to make sure you’re on track to meet your goals. If you keep your goals in mind and stick to your plan, they may be achieved sooner than you think.
This guide was adapted from an original article written by Dr Richard Chater.