One of the pillars of personal finance is creating a budget. Now I know it’s not the most exciting topic in the world but it is essential if you want to take control of your finances.
Let’s have a look at how you can create a budget and start saving more!
First of all…
What do I mean by a budget?
By a budget, I simply mean keeping a detailed record of any money that you’re receiving as well as everything you’re spending your money on.
By gathering this information, you can get an overview of your expenses and decide how much you think you should be spending every week, or even every month. In other words you set a budget that you can stick to.
You don’t have to do this forever if you don’t want to, you just have to do it until you get on top of things.
Why do I need a budget?
Unfortunately, most people only really start to save money if there is a specific reason to do so. This could be either for a new car, a wedding, or maybe even a deposit for a house.
However, I believe most people should be saving as much as they can all the time. This will not only help to build up some money in case of unforeseen circumstances, but it will also help to create more options for yourself in the future (e.g. early retirement).
To achieve this, you’re going to have to find a way to start putting money away. This is difficult if you don’t know where your money is going in the first place. That’s where a budget comes in.
Creating a budget is a great way to understand your spending habits and free up some of your money.
How do I create a budget?
There are many ways in which you can create a budget. Personally, I prefer to use an excel spreadsheet. This helps me to do quick calculations and categorise my spending. However, you can just as easily create one on paper or in a journal.
It doesn’t have to be fancy, you just need to figure out everything that is coming in and everything that is going out.
Make one sheet for your incoming money (e.g. wages), and one for your spending. Now add the following columns to each sheet:
- Short Description of Income/Expense – (e.g. Wage, Shopping at Sainsburys, Train Journey)
- Category of Cost – (e.g. Food, Rent, Transport)
- Date of Income/Expense
- The Amount
It should look a little like this:
|Short Description of |
|Category of Cost||Date of |
|Train Journey||Transport||02 November 2019||£ 8.50|
What do I do after I have created my budget?
After you have initially created your budget, make an effort to track everything. The goal at the moment is to just find out where your money is going. The setting and sticking to a budget part comes later on.
Use your bank statements or online bank summaries to help you keep track of everything for at least 2 months. I say 2 months because that way you can capture anything that might be going in or out on a monthly basis.
Also try to factor in any other costs that might come out on a quarterly or annual basis (e.g. car insurance, water bills, etc.).
Do I have to track every little thing?
Yes – the more accurate you are, the better. Even if it’s just a few quid on a coffee, make a note and track it. Spending small amounts frequently is much easier to do psychologically than spending large amounts infrequently.
You might be surprised just how much those small amounts add up to over a few months. It sounds silly but I recently bought a stamp for 70p and that went on my budget.
Do I need to record the date of each transaction?
Yes. Getting into a habit of keeping track of the date you spend money also helps if you want to get a better picture of your spending. From my budget spreadsheet, I can create all sorts of graphs and charts to show me visually when and what I’m spending my money on.
I find it much easier to understand it this way as I can see the information in a visual and chronological way.
What If I don’t have time?
While initially it might take some time to create a budget, adding to it every day should not take that long. If you mainly use a card for all of your purchases, you can simply sit down at the end of each day, or week, and add the spending to your budget.
If you use cash, just be sure to make a note of any purchases on your phone or something so that you can add them to your budget later.
What do I do after I’ve kept track of my finances for 2+ months?
After keeping track of your income and outgoings for 2+ months, you should have enough data to work with. Now it’s time to sit down with your budget and really analyse what you can cut out.
Maybe you have a gym membership that you’re paying for but do not use. Or maybe you are subscribed to a service that you know you could live without.
Even if it is just a small amount, if it doesn’t add value to your life, find a way to reduce the expense or eliminate it altogether. This will dramatically help you to save more.
At this point, you can also set yourself a budget – this is the amount that you think you should be spending every week, or month. Finding ways to stick to it might be challenging, but you can do it.
Tips for when you are successfully saving money through budgeting
If you’ve made it this far, congratulations! It takes a lot of discipline to track your spending and stick to a budget. Be proud that you’ve taken action and taken back control of your finances.
Be careful here though because it’s extremely tempting to go out on a spending spree just because you have more money available. You don’t want to end up back where you started. Keep locking away those savings as if you didn’t have them in the first place.
Doing this will ensure that you will be financially prepared for anything that crops up unexpectedly. It will also help you to build up your savings to a point where you may even be able to do some of the things you’ve always wanted to (like travel the world) or even retire early.
Here’s an article from Investopedia that also outlines the benefits of having a budget.
One last thing to remember
Go easy on yourself.
While setting a budget and sticking to it is great, don’t get hung up if you end up going over by a little bit. Figure out why you went over, learn from it and try to do better the next month. There’s no need to beat yourself up about it.
As always, I like to end each article with a question to see what your thoughts are.
How many of you have set up a budget before?
If you have, has it helped you to save more money?