How to budget

Last updated 09 Jan 2020

Whether you’re starting your first job or a year at university, whether it’s an annual salary, an hourly wage or a student loan, the chances are you will have to learn how to budget. Here’s our easy guide:

1. Get organised

Collate everything you’ll need before getting started:

- A few months’ worth of bank statements

- Your monthly bills and outgoings – credit cards, phone, Spotify, Netflix

- Any other incomes you may have – loans, wages, gifts from family

2. Add up your income

Next, you need to calculate your income. Make a list of your regular earnings from employment (after tax and National Insurance has been deducted), as well as any income you have from elsewhere, eg. if your Nan puts £10 in your account every month.

Make sure you don’t focus only on monthly incomes. If you have weekly, yearly or sporadic earnings such as selling stuff regularly on Ebay, be careful to add these.

Use an Excel spreadsheet or a budgeting app to input your income, separating annual/irregular and monthly earnings into two columns. Once you’ve done this, calculate overall totals for each income ‘stream’, as well as a grand ‘yearly earnings’ figure.

3. Work out how much you spend

Look at your bank statements, household bills and credit card bills to ensure you have a realistic idea of where your cash is going – and avoid guessing wherever possible, as the more accurate your figures are, the more useful you’ll find the budget you draw up.

Remember to take into account occasional spending, not just monthly expenditures. Think about the cost of Christmas, birthdays, travel home to visit the parents, and add costs like these into your list of expenses – ideally in a separate ‘yearly/occasional outgoings’ column.

Once you’ve included everything, add up your monthly and occasional spending separately so you end up with two totals.

Next, calculate an overall figure that incorporates all your yearly expenditure. If you divide this number by 12 and look at the difference between your result and your ‘regular spending’ total, you’ll see how much money you need to earmark each month for ‘irregular’ spending on things like nights out and gifts.

4. Compare what’s coming in and going out

Subtract your annual and monthly expenditure totals from your annual and monthly income figures. What you’re left with will be the yearly and monthly surpluses – or shortfalls – in your finances. A shortfall will be indicated by a negative number.

If you’re spending more than you earn at the moment, making a budget is a crucial task you shouldn’t put off: if your expenditure regularly exceeds your income, you’ll drift into debt – and if you don’t address the situation, you could find yourself in a downward financial spiral that's difficult to escape.

5. Draw up a budget you can stick to

You need to be realistic when budget planning: it should consist of what you intend to spend each month, and in some cases each year, on key things – but remember there are certain costs that will be impossible or very difficult to cut, while others will be easier to tweak.

Small changes such as not buying a takeaway coffee every day could make a big difference to your budget over the long-term.

Meanwhile, changes to your lifestyle that you’ll barely notice – such as switching your Spotify account from Premium to Free, or forgoing Netflix – could help to balance your budget without the need for real cut-backs.

Once you’ve drawn up your budget, it’s important to keep an eye on how faithfully you’re sticking to it – particularly in the first few months.