How to Budget Properly

Budgeting is a useful activity that could help you keep on top of your spending. Taking a good look at the money you have coming in every month and where it goes out could also help declutter your finances by cutting out any unnecessary spending.
If you’re wondering how to budget properly, the Little Loans guide could help you get started.

Why is it important to create a budget?

There are many benefits to creating a monthly budget.
Budgeting could help you:

• Keep track of your spending.
• Reduce the risk of overspending.
• See where you could make savings.

How should a beginner budget?

Anyone can create a personal budget, and the great news is that budgeting for beginners can be really simple.
Below, we’ll share a step-by-step guide on how to budget and the tools you’ll need to get started.

What do I need to create a budget?

• A calculator.
• A laptop, phone, or good old-fashioned pen and paper.

You can create a budget using a template like this one, put together by MoneyHelper. You can use a spreadsheet, or even the ‘notes’ section on your phone.

How to create a budget

1. Work out your guaranteed monthly income

This is the amount of money you’re guaranteed to have coming in every month, after tax and any deductions, such as National Insurance, pension contributions, or student loan repayments.
Your guaranteed monthly income could include:

• Wages from a full- or part-time job.
• Money earned from a side hustle.
• Any benefits you receive.

2. Make a list of your monthly outgoings

Your outgoings can be split into three sections:

• Essential monthly outgoings. This includes rent or mortgage, household bills, groceries, medical prescriptions, repayments on any credit accounts you have, and travel.
• Non-essential monthly outgoings, such as a gym membership or a subscription service.
• Any other non-essential outgoings for the month ahead. These are any other expenses you expect to have in the next month, such as a day out, or birthday or Christmas spending.

3. Take some time to go through your outgoings

Now’s the perfect time to give your outgoings some attention! You may not need to do this every month, but making a habit of looking at your outgoings in close detail every few weeks could help you understand where your money goes.

Take a look at any subscriptions or memberships and ask yourself whether you’re still using them. Did you sign up for a TV service just to binge-watch a new series of your favourite show? Are you still streaming enough to justify the monthly cost? Perhaps you joined the gym with good intentions in January, but life got in the way, and you haven’t been since (us too!). In these situations, you might consider cancelling your subscriptions to save some money.

4. Work out your disposable income

Subtract (or ‘take away’) all your outgoings from your guaranteed income. The money you’re left with is called your disposable income, and you can save or spend this however you choose.

An example of budgeting

Jennifer lives alone and takes home £2,100 from her job, after tax and deductions. Here’s an example of Jennifer’s outgoings for May.

• In May, Jennifer expects to spend around £1,858. This includes her essential and non-essential costs, and those one-off birthday expenses.
• This leaves Jennifer with a disposable income of £242, which she can choose to spend or save.

(Please note, the example is just an illustration. You may have entirely different essential and non-essential outgoings.)

How much money should I save?

Saving money is important, as is paying your bills on time and making sure you have enough for groceries. Once your essentials have been paid for, only you can decide how much money you put away each month into a savings account, but whether it’s £50 or £5, having a financial safety net is always a good idea.
Maybe you’re saving for a rainy day or a bucket list trip?
Setting yourself a savings goal will give you a figure to work towards.
You might find that one month you save more, and the next month you save less–and that’s okay. Things can change.

Common budgeting mistakes

It might take you a couple of attempts to get the hang of budgeting, so don’t stress; it should get easier over time. After all, practice makes perfect.
However, if you’re finding it difficult to get the hang of budgeting, we’ve included some common mistakes below.

• Using your ‘gross pay’ rather than your ‘net pay’
  When it comes to wages, you’ll typically see two figures on your payslips. One is your gross pay, which is your total pay before tax and any deductions. Deductions can include tax, National Insurance, student loan repayments, or pension contributions.
  The other amount is your ‘net’ pay, which is also known as your ‘take-home pay’. Your net pay is the amount of money you’ll be paid after deductions have been taken.


• Underestimating your outgoings
  This is a common budgeting mistake and could mean you find yourself short of money at the end of the month.
  If you’re unsure of the exact amount of money you’ll pay towards your essential outgoings, it’s always better to overestimate rather than underestimate.


• Forgetting essential outgoings that are not paid monthly
  Do you have any bills or outgoings that are paid annually, or every couple of months? Don’t forget to add these to your essential outgoings when they’re due.


• Over-budgeting
  Budgeting too ‘harshly’ by putting all your disposable income into savings could make you feel stressed if an unexpected expense crops up, or disappointed if you’re going without the hobbies you enjoy or socialising with friends. Remember, it’s all about balance.


• Forgetting to cancel subscriptions
  Paying for services you’re not getting your money’s worth from will eat into your budget, as will signing up for a free trial and forgetting to cancel before you’re charged. As we’ve talked about above, it’s a good idea to go through your subscriptions on a regular basis to see what you’re actually using.

I’m struggling with money; what can I do?

If you’re finding it difficult to manage your money, or you’d like some more support with budgeting, please know that help is available. You can get free, confidential advice from StepChange, MoneyHelper, Citizens Advice, and National Debtline.