How to create a monthly budget – 7 step guide

Top Tips To Create A Monthly Budget
July 26, 2020 by Stuart Smale

Organising your finances gives you peace of mind, no matter how much or how little cash you have. Creating a monthly budget is one of the simplest ways to take control of your finances and get the most out of your income.

It’s a valuable exercise in understanding how money works and – importantly – how it can work for you to build a more secure and brighter future.

Why is a monthly budget a good idea?

A monthly budget allows you to keep track of your income and expenses, plan your spending and make informed decisions about money.

When you have a clear picture of what your commitments are, you can prioritise what you spend your money on so that essential bills are always paid every month.

In this way, you should have enough money to last for the whole month, avoiding days leading up to payday when your funds are dwindling.

A monthly budget can also help you identify how much money, however little, you can save a month. Over time, you can enjoy the satisfaction of seeing your nest egg grow, knowing that you always have a financial buffer to fall back on.

It can also help with long-term planning, for example, saving for a once-in-a-lifetime holiday or allocating how much you can put in your pension every month.

In short, a budget is a foundation for your financial health and future.

Now that you know why a monthly budget is a good thing, let’s look at how to make it happen!

1. Decide how to record your monthly budget

You can record your monthly budget in a number of different ways. If you like the old school vibe of paper and pen, a simple notebook with pre-printed or hand-drawn columns will do the job adequately.

Many people like the ease of computer programmes such as Excel. The beauty of using it is that the calculations are automatically done for you, taking the hard work out of budgeting.

To create a simple budget in Excel, firstly open up a blank spreadsheet. Type in the months cell by cell across a row.

In the column to the left of ‘January’, type in ‘Income’ and then underneath that, using one cell per category. These should cover the different types of expenditure you have such as ‘Groceries’, ‘Petrol’ and ‘Phone’.

Add in your figures for each cell and use the ‘Autosum’ function to total the figures for each month’s column.

You can also use a free budgeting app on your phone such as Money Dashboard, Yolt or Emma.

2. Go through your income and spending for the past three months

Now that you have the format for recording your budget set up, you need to get familiar with the money coming in and out of your bank account every month.

Start with your salary. If you get paid a fixed salary, that’s the easy part. If you have income from a number of sources, work out your average monthly income over a period of three months. Now you know what you’ve got to work with.

Next, invest some time in getting to know your bank statement like the back of your hand. Categorise your spending in the form of individual bills, debts, groceries, transport, childcare costs and so on.

Using this methodology, try working out an average total spend per month.

You should now have a clear picture of whether or not you are living within your means.

3. Make everyday savings to help your monthly budget go further

So, how did you do in the exercise set out in the previous step? If you found that you have more money left over than you’ve spent every month… congratulations!

If you have found that you are over-spending every month, now’s your opportunity to turn things around. Start by looking at where you can make small savings. Here are some ideas to get you going:

Save on food

• Take a flask of homemade coffee to work instead of buying from a café.
• The same goes for homemade lunches and snacks. Last night’s leftovers can make a tasty – and cheap – alternative to buying sandwiches or eating out.
• When doing your grocery shopping, use a price comparison website such as latestdeals.co.uk which will show you what you can save by shopping around.
• Don’t waste food – freeze leftovers to use another day or try growing your own herbs and vegetables so you can pick only as much as you need.
• Reduce the cost of eating out by searching for discount vouchers online. You can use websites such as HotUKDeals or MyVoucherCodes to find discounts on dining out, as well as everyday expenditure.

Sign up for loyalty cards

• Make sure you are signed up for loyalty cards in any stores where you shop regularly.
• Know that some loyalty cards allow you to collect points at other stores too.
• Get the most out of your loyalty points when they are doubled around Christmas time and other special occasions.
• You might also be able to exchange your points for days and meals out.

Ditch the debits

• Cancel any subscriptions or direct debits that you don’t use.
• It’s a good idea to carry out an audit every three months and ask yourself whether you actually use the service you’re paying for, ditching any that you don’t.
• Weed out things like insurance policies for white goods that you no longer have or annual passes for attractions that you no longer live near enough to visit.

Travel and transport

• Buy your car insurance online – it’s easier to compare and make a decision that can save you money.
• Consider joining a car-sharing scheme, which could be run by your employer or check out the Liftshare website to partner up with commuters in your area.
• If you’re looking for a new car, remember that those with the lowest emissions are exempt from car tax – this could save you hundreds of pounds a year.

Harness energy to save money

• Did you know that turning down your thermostat by as little as one degree could save you 10% on your energy bills?
• Remember to keep your central heating off at night and when you are away from home to keep costs down. This is easy to do nowadays by controlling your heating using an app on your smartphone.
• One of the biggest savings you can make is by insulating your loft, and you could even recoup the initial outlay within a couple of years.
• If you have an older boiler, consider updating it for a newer, more energy-efficient model
• You could potentially save hundreds of pounds a year by switching your energy supplier – it’s worth shopping around.

Review your biggest commitment

• For many people, their mortgage is their biggest financial commitment. If the fixed term of your mortgage is coming to an end, it could be worth making an appointment with an independent mortgage broker to find out if you could get a better deal.
• If you’re a first-time buyer, bear in mind that the bigger the deposit you put down, the less you will pay in interest over time, boosting your monthly budget for years to come.
• If you are in the fortunate position of being able to overpay on your mortgage and reduce its term, you could potentially save thousands of pounds in the long-term.

Consider alternative treatments

• Save on haircuts and beauty treatments by getting them done by a student at your local further education college – many offer affordable prices in exchange for helping students to train in their craft.

4. Take control of debt

Now that you have a full picture of your income, expenses and potential savings, you are in a strong position to take control of any debt you have. This is an important feature of your monthly budget, and successfully managing your debts has the potential to release money every month.

Here are our top tips on managing your debts:

• If you have several debts, work out what your priority debts are. These are the ones that could seriously impact your day-to-day life if you don’t keep up with them, like mortgage payments or your council tax bill. Ensure that you are up-to-date with these debts. If you are struggling, talk to your lender and work out a payment plan.
• Once you’ve got your priority debts under control, target your most costly debt first or the one with the highest interest rate. Overpay as much as you can on this one until it is clear, then focus on your next most costly debt.
• For credit cards, don’t just pay the minimum amount every month – pay a little bit extra. You can also do this on some types of loans.
• Consider moving credit card debts to a new 0% balance transfer card to save paying interest. Although there may be an initial fee, you can usually save money in the long term.
• If you are really struggling, talk to a charity such as StepChange for advice on how to manage your debts.

5. The fun part – managing your savings

If you’ve followed the above steps, you should soon be in the enviable position of deciding what to do with the money you have saved. This is the fun part of budgeting!

Remember that saving money doesn’t mean you can’t enjoy yourself – even saving a little bit of money every month as part of your budget means you can still allocate a bit of extra cash for treats too.

Here are some of our painless ways to save money every month as part of your budget:

• Use a ‘round-up’ app that rounds up every purchase you make to the nearest pound and deposits the difference in a savings pot.
• Set up a standing order that transfers money to your savings account as soon as you are paid.
• Invest in a piggy bank or money-saving tin that you can’t access without cutting or breaking it open. Make a habit of depositing your £2 coins in there and you’ll find you have a sizeable pot after only a few months.
• Many banks will let you run several savings accounts at once and name them individually too. This makes saving for several goals at once clear and simple.
• Don’t forget to make the most of your annual ISA limit. An ISA (individual savings account) lets you earn interest or capital gains without having to pay tax, up to a balance of £20,000 in the current (2020/21) tax year.

6. Top tips to boost your monthly budget

Got this far? Now that you’re a budgeting and savings pro, let’s look at some ways to earn a little bit of extra cash alongside your regular salary to stretch your monthly budget even further.

• If you have a spare room, consider letting it out to a lodger or advertise on Airbnb. With the government’s Rent A Room scheme you can earn up to £7,500 per year this way tax-free.
• If you live in an area popular with commuters, you can rent out your drive or car parking space for some extra pounds.
• If you have a flair for writing, consider setting up a blog with paid adverts.
• Combine a good declutter of your house with a selling session on eBay or Facebook.
• Did you know you can get paid for offering your opinion? There are plenty of online sites out there that will reimburse you with cash for filling in surveys.

7. Review your monthly budget regularly

How is your monthly budget looking now? If you’ve followed our step-by-step guide, it should be in a pretty healthy condition. But it never pays to be complacent, so our last tip is to make a date in your diary every three months to review your monthly budget.

If you’ve got this far, it should be a satisfying experience as you see your expenditure fit well within the limits of your income while your debts reduce and your savings grow.

The final word

Working out a monthly budget for the first time may seem daunting, but once you’ve set out your income and expenditure, crunched your numbers and worked out how much money you can allocate to each of your commitments, you’ll reap many rewards.

One of the most satisfying of these will be the peace of mind of knowing that you can meet all your commitments each month, with cash left over to treat yourself or to save for a rainy day.

Is the managing director of Cobra Payday Loans and Ready Money Capital Limited. He is responsible for all the day to day functions and performance of both companies and regularly contributes information on the short term finance sector. Stuart is an approved person with the Financial Conduct Authority, holding SMF3 (Executive Director) status.

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