Budgeting 101: How To Set A Budget (That You’ll Stick To!)

If you want to have more money to spend on the things you really love and not face the stresses of struggling to pay for the things you need then you need to set a budget.

Setting a budget might sound restricting but there’s actually a huge amount of freedom in taking control of where your money is going and planning how to meet savings goals.

Budgeting quick guide

Write down income
Write down outgoings
Review your pension
Consider your savings goals – how much do you need to set aside every month to meet them
Review your outgoings – cut back on unnecessary spending and consider a budgeting system such as the 50/30/20 rule
Figure out ways to boost your income – are you due a pay rise at work? Can you start a side hustle?

Many of us bury our heads in the sand and are just glad when we get to pay day having avoided our overdraft.

The issue with not having total control of where your hard earned cash goes is that it probably means you’re not planning for the future. Both the stuff you know will happen – retirement, buying a bigger house, helping your kids with university costs – and the stuff you cannot foresee – home repairs, car repairs and job loss.

By setting a budget you can:

Plan how to pay off any debts
Save more for your future
Having money set aside for unexpected costs
Afford to pay for the stuff you love – holidays and Christmas gifts for the kids
Have peace of mind that you can afford the monthly necessities (food, mortgage/rent, water, energy bills)

Budgeting methods

There are a few different methods you can try when it comes to sitting down and figuring out your budget.

Some of these may work for you and others may not appeal. You can do it your own way with your own rules of course – the key thing is you are setting a budget that lets you live below your means and save money for the future so you can build wealth.

Here are a few budgeting methods you could try

50/30/20

This is a popular method of setting a budget that encourages you to set a budget that sticks to rules for dividing up your money.

It means that when you have your total income, you will allocate money to your budget in the following ways:

50% goes towards your needs – ie rent and bills
30% goes on stuff you want – ie days out and new stuff
20% goes into savings

This can be great for some people, but isn’t for everyone. Some people may simply have to spend more on their needs than 50% of their income, and that’s OK. You can always do an adapted version of this method, where you have say 60% on needs, 20% on wants and 20% on savings.

Cash envelopes

This is where you withdraw the cash you will spend that month and allocate set amounts of money into different envelopes labelled by category.

The idea is this is a more physical way of keeping an eye on your budget and is intended to stop you from impulse purchasing.

Zero base budgeting

This method involves allocating every single penny you earn to a specific purpose. It means you are aware and in control of all of your spending.

The idea is that you start with your income, and you allocate money to your expenses, wants and savings until you get to zero.

Setting a budget

Let’s take a look at exactly how you can set your own budget easily.

Write down your income

Start by writing down all of your earnings, including money you make from your job, any side hustles and investments you have.

You will need to take into account tax you need to pay. If you are employed then you’ll be able to see your take home pay as your employed deducts your tax and national insurance from your pay.

However if you are working for yourself then you need to be setting aside tax every month so you can pay the annual bill to HMRC.

Write down all your existing outgoings

When doing this grab all of your relevant records such as latest bills, direct debit commitments, receipts and your bank statements.

Review how much you spent on extras – such as your takeaway coffees, nights out, clothes and hobbies – in the last few months to figure out an average spend.

You need to figure out what you tend to spend on stuff that isn’t connected to your household bills like the mortgage, groceries and energy bills.

But you also want to cast the net wider than a random month’s spending and look at annual costs – such as your holiday and what you spend on Christmas and birthdays.

It may help to break it down into categories.

These are the outgoings your list may include:

Needs – Household bills

Rent/mortgage
Council tax
Energy bills
Water bill
Food
Fuel
Car maintenance
Essential travel – ie railcard for travel to work
Insurance

Wants – Spending on extras

Shopping – clothes and household decor
Takeaways
Days out
Holidays
Subscriptions to TV and music streaming services
Hobbies – kids clubs and gym membership
Pets

Savings

Pension
Emergency fund
Savings for kids
Investments

Make adjustments

If you are underspending every month then you’re doing great! Now you can consider where to put the money leftover every month so that it works for you. A savings account with a decent interest rate will help you grow that money.

However if you are overspending and digging into your overdraft every month then this is the point where you need to adjust your spending.

Keep an expenses calendar

It can help to note down the dates when your expenses will be leaving your bank account, so that you are aware that whatever your bank balance currently shows, there is some payments to come out.

Examine the places where you could cut back.

Some things such as clothing will of course overlap with needs, as you may have necessary items to purchase. This is where a budget will help, as you can set how much you can afford to spend on clothes and shoes, then you will prioritise that figure on the stuff you need.

If you do need to cut back on your spending then a look at these frugal living tips can give you inspiration.

If you find sticking to spending plans tricky then cash envelopes work for some people. I have free cash envelope printable templates.

Plan ahead

There are certain annual costs you can see coming.

These include:

Insurance renewals
Car MOT
Christmas – gifts, food, parties, etc
Birthday gifts and birthday parties
Holidays

In order to be able to afford these it’s wise to spread the cost across the course of the year, so that they don’t jump up and shock you into your overdraft.

You can put money aside into a pot known as a sinking fund – this could be a pot within your bank account (many banking apps allow you to organise your money into pots) or a separate saver.

A sinking fund is money for your expected costs.

It’s a particularly good ideas because certain annual bill, like insurance, are cheaper when paid in one lump sum rather than monthly.

Do not trust your bank balance

It’s worth popping this tip in at this stage, because you may well go through this entire process outlined in this article and then revert to the same habits I used to.

That was to assume I had money to spend, and just spend it. If I wanted to buy something, I went with what was in my bank account right now, saw the money was there, and bought it.

What I do now is track my spending and set a budget at the start of the month. This way I am clear on what money is available for random spending, and the spending commitments I must cover at the end of the month.

Do not buy based on what your bank balance is today – always remember that other costs, which may well be more important than the thing you want to buy now, are just around the corner.

Consider your savings goals

What are you saving for and how much do you need?

How much you should be saving will be different for everyone.

One thing that can help you with this is the 50/30/20 budgeting rule.

So for example if your take home pay is £2,000 after tax, then this would work like this:

£1000 spent on your needs
£600 spent on stuff you want
£400 saved

If you stuck with this rule for an entire year you would save £4,800.

Review your pension & retirement goals

When you’re getting started with budgeting or setting a new budget it’s a good opportunity to review your pension.

Most pension providers have great calculator tools online that let you see what you’re on target to have in savings for when you retire.

If you are falling short of what you hope to have when you are older then now is the time to make some changes and consider putting more into your pension.

Ensure changes are realistic

Whatever changes you make to your budget it needs to be sustainable and not cause you to be demotivated.

Sometimes we need to make drastic changes to make a budget balance, but it is all about finding compromises where possible so you can afford the stuff you really love.

Review every month

Going forward it’s important to check how you are doing with your budget every single month to check your progress.

If you are not staying on track with what you set as your budget then look at the details of your spending and see what went wrong.

This is where a budget tracker to record your spending can really help. I have a free printable budget tracker you can use.

Alternatively if you prefer to keep track on a spreadsheet then I have an amazing budgeting tool you can use. You can input all of your spending, income and savings here to keep track of how you are doing with your budgeting every month.

Check out my budgeting spreadsheet here.

Prioritise your spending

As part of setting your budget it’s important to think about your spending priorities and ensure you are practicing intentional spending, rather than making impulse purchases that take you over budget.

Here are the key things to think about.

Get rid of debt

Debt is a vicious cycle and it’s important to free yourself from it as quickly as you can.

Make a plan for how you will pay of your debts. You can always enlist the help of amazing debt advice charities and organisations who can advise you on what to do next.

Create an emergency fund

Emergencies are sure to come up and they can unfortunately plunge you back into debt.

Plan for the unexpected with an emergency fund. Some people suggest the ideal emergency fund contains between three and six months of expenses.

It should be able to cover your living expenses if you lose some or all of your income, or cover an emergency such as emergency repairs to your home.

Create a sinking fund

This is a savings pot to cover your expected annual expenses, such as your car insurance renewal or summer holiday.

Having a sinking fund means you are prepared to large expenses like Christmas, when you’re likely to be spending a lot of money, by spreading the cost out over the year.

When I work out what my sinking fund needs I add up all my annual expected costs, then divide that figure by 12.

This gives me the monthly amount to set aside so I can cover those costs, and means I won’t be tempted to overspend in a month when I don’t have any big bills to cover.

Think about savings goals

We all have something we want to save towards – whether it be our retirement, a bigger house, a new car or a special holiday.

Once you’ve covered the stuff that is a priority in your budget then you can move on to what your saving goals are and set a realistic amount you can set aside every month.

The goal is to try and increase this as much as possible, balancing the amount you put into savings every month with what you want to spend on the fun stuff like going out.