How to Create a Budget You Can Stick To

Have you read my post about Spring Cleaning your Finances and are keen to take the first step in taking charge?  Creating a budget is the cornerstone of financial stability and success. It provides a roadmap for managing your money effectively, achieving your financial goals, and securing your future. However, the process of budgeting can seem daunting, especially for those new to personal finance. Fortunately, with the right approach and mindset, anyone can master the art of budgeting. In this post, we’ll explore step-by-step, how to create a budget that works for you.

Calculate Your Income

The first step in creating a budget is determining your total income. This includes all sources of revenue, such as your salary and any other forms of income. Include any benefits, child maintenance or other income and make sure to calculate your income after taxes and deductions to get an accurate picture of what you have available to allocate towards expenses, debts and savings.

Identify Fixed Expenses

Next, list out your fixed expenses – those expenses that remain consistent month after month. This includes necessities such as rent or mortgage payments, utilities, Council Tax, insurance premiums, and loan payments. Fixed expenses are typically non-negotiable and must be accounted for in your budget.  These expenses can also include things like your gym membership, contact lens subscription, TV subscriptions etc. This is usually the easiest part of your budget to work out as it stays relatively consistent.

Track Variable Expenses

Once you have worked out your fixed expenses, move on to your variable expenses. Unlike fixed expenses, these will fluctuate from month to month. These may include groceries, transportation costs, eating out, entertainment, and miscellaneous expenses. To more accurately budget for variable expenses, track your spending over several months to identify patterns and average monthly expenditures.  The best way to do this is to go back over your bank statements for the last few months and track every expense. You can then categorise these expenses to work out what your budget should be for each category. This aspect of creating your budget can often be quite eye-opening as you realise how much you really spend in B&M or Costa!

Distinguish Between Wants and Needs

To prioritise your spending, distinguish between wants and needs. Needs are essential for survival and maintaining a basic standard of living, such as food, shelter and healthcare. Wants, on the other hand, are non-essential items or services that provide enjoyment or convenience. While it’s important to fulfil both wants and needs, prioritise your needs when allocating funds in your budget.  While cutting out some wants can be a good way to save money, don’t cut back everything at once as it will make sticking to your budget impossible.  Like a diet, you will manage for a while but feel deprived and likely binge (spend) and give up because it is too hard to stick to.

Identify Areas for Cutting Back

Once you’ve identified your expenses, look for areas where you can cut back or reduce spending. This might involve negotiating lower utility bills, finding cheaper alternatives for everyday expenses, or eliminating unnecessary subscriptions or memberships. Small adjustments can add up to significant savings over time.  As I have previously said, don’t cut everything out at once.  You want your budget to be easy and manageable.  

For example, if you currently buy three takeaways a week, first cut that down to two and see how much you can save.  If that feels manageable, after a while, cut out another, so you are only getting one per week.  You may find that you then enjoy the challenge and want to cut down to one every other week or like me, one per month. You will find this easier and more manageable if you plan your meals and enjoy what you are cooking at home.

If you love to travel, try finding more budget friendly opportunities so you don’t feel like you are missing out too much. The UK has so many great places to visit and you may find some hidden gems in places you would never have considered before.

Build an Emergency Fund

Building an emergency fund before aggressively tackling debt is important to ensure financial stability. While eliminating debt is crucial, without a safety net, there is the risk that you will fall deeper into debt when an unexpected expense arises. Having an emergency fund of approximately £1000 provides a cushion for unforeseen circumstances, such as car or home repairs, allowing you to address these expenses without resorting to high-interest loans or credit cards. If this figure seems too high and unattainable, try first saving £300 – £500. This should help with most unforeseen expenses and is less daunting than the larger value. You can then use this money in an emergency, such as if your washing machine blows up or your car breaks down.

Utilise Sinking Funds

Sinking funds are a proactive way to save for irregular or infrequent expenses, such as vehicle servicing, holidays or gifts. When you create your budget, allocate a portion each month towards specific sinking funds to ensure you have funds available when these expected expenses arise. This prevents you from dipping into your emergency savings or relying on credit cards to cover these costs. To work out how much to allocate to these funds, look at previous costs to get an idea, add a little for price increases (I generally round it up to a whole number) and divide by 12.

I have a number of sinking funds that I put money into every month as part of my budget.  Because I have my MOT and service at the same time every year, I put aside a monthly amount to build up this sinking fund to pay for the expense.  I budget enough for the basic cost of the MOT and service, plus a little extra in case I need repairs. I budget roughly £200 for the MOT and service and £280 for repairs and tyres. If there are major repairs needed that are more than I have budgeted for, I will take any extra from my emergency fund to cover this and build that fund back up over the following months.

I have always saved monthly for Christmas which I find helps me massively to spend appropriately. I budget a set amount per person so know what I need to save in total.  This year I am trying something a little different by saving money I have made from selling old clothes and any cashback I get from cashback apps and survey apps.

Rounding up transactions

I also round up my transactions into a fund saving for a pair of Louboutin Kates! Frivolous I know, but it gives me something special to save up for that would usually be way out of my budget.  This method could be used for other means, though.  Like creating a savings pot from rounded up change which can go towards making an emergency fund, investment fund or help to pay off debt. I like this method of saving as it doesn’t feel like you are taking any extra out of your budget, but the pot will add up.

Try budgeting accounts

I currently use HyperJar for my budgeting as I can separate out my budgets and spend directly from the jar. This is a feature that I really like and I really rate the app and the fact you get free kids cards. I have written a review on HyperJar that I recommend reading before you dive in.  I have just opened a Monzo account, however, which I will be trialling and writing a comparison article soon.  So far the account looks great and you can create pots and do automatic rounding up (unlike in HyperJar).  You can also get interest on your savings if you pay a monthy fee for the premium account. If you’re interested in trying Monzo, you can get £5 free when you sign up via my link.

Prioritise Debt Repayment

If you have high-interest debt, such as credit card debt or personal loans, prioritise paying it off as quickly as possible. Allocate extra funds from your budget towards debt repayment to reduce interest charges and accelerate your journey towards financial freedom. Consider utilising the debt snowball or debt avalanche method to systematically pay off your debts.

Emergency Savings

Many experts also suggest having a bigger emergency fund of 3-6 months of expenses in case of long term illness, job loss or other major event.  It is a break glass in case of emergency type of fund. Building up this savings fund is something that can be tackled once debts have been paid off as you can divert the money you were paying on debt to your emergency savings, enabling you to build up it up quickly.

It is at this point that you will also want to look at investing money for the future.  Opening a Stocks and Shares ISA (or Roth IRA for our American friends) is a simple and tax efficient way of investing for the future.  There are a number of options available, so do shop around.  I have my main investment account with my own bank, Santander but also have an account with Trading212.  I like and rate both, but if you sign up to Trading212, open an investment account or Stocks and Shares ISA and deposit just £1, you will get a free fractional share worth up to £100 to start you off.

Be Flexible

Flexibility is key to maintaining a sustainable budget. Life is unpredictable, and your financial situation may change unexpectedly. Be prepared to adjust your budget as needed to accommodate changes in income, expenses, or financial goals. Embrace flexibility and view budgeting as a dynamic process rather than a rigid set of rules.  Never be so fixated on the first iteration of your budget that you refuse to adjust it.  No-one gets things right first time.  Some months will also work better than others.  

Don’t Deprive Yourself Completely

While it’s important to prioritise financial goals and exercise discipline, don’t deprive yourself of all enjoyment and pleasure. Budgeting doesn’t mean cutting out everything you love; rather, it’s about finding ways to enjoy life within your means. Look for creative ways to indulge in your favourite activities or treats without breaking the bank. This might involve DIY projects, exploring free or low-cost entertainment options, or taking advantage of discounts and promotions.

In conclusion, creating a budget is a powerful tool for achieving financial stability and realising your financial goals. By carefully assessing your income, identifying expenses, distinguishing between wants and needs, prioritising debt repayment, and embracing flexibility, you can create a budget that empowers you to take control of your finances. Remember, budgeting is a journey, not a destination. Stay committed, stay adaptable, and watch your financial future flourish.

Are you ready to get started on your budgeting journey? Follow me for more hints, tips and advice and don’t forget to subscribe to my newsletter.