Rebekah MayAsk any financial expert for advice on managing your money and we bet theyâll tell you to create your first budget.
A budget is a term commonly used to describe a detailed plan for your spending. It looks at your monthly income and then assigns a purpose for every pound.
This quote by John Maxwell sums it up perfectly – âA budget is telling your money where to go, instead of wondering where it wentâ.
If you find yourself wondering where the hell all your money has gone each month, then it’s time you created your first budget.
Youâll feel so much more in control of your money, youâll start hitting big financial goals, and youâll find that youâre actually spending your money more wisely!
1. Think about why you want to create a budget:
A lot of people think that having a budget is restrictive. They see a budget as something that is going to stop them spending their money in the way they want. In reality, having a budget actually gives you more freedom to spend.
Think about each of the long-term benefits that having a budget brings, like greater control over your money. More awareness of how youâre spending. And more recognition of how much youâre saving.
You could even picture some big financial goals that youâll achieve because of your budget. Like saving a big pot for retirement, paying off a credit card, or saving for a new car.
2. Write down your monthly income:
To create your first budget you need to know how much you get paid each month.
If youâre on a set salary where youâre paid the same amount each month then this step is fairly easy. Look at last month’s payslip, or a recent bank statement to see how much youâve been paid after tax.
If youâre paid different amounts each month, then look at your past six months’ salary and work out the average amount youâve been paid. This step will be slightly different for everyone, but the goal is to estimate your next month’s income.
* Tip: Download Emma and you wonât have to search through all your bank statements. Weâll help you identify your monthly income in a matter of minutes
3. Write down all your outgoings:
This next step is a biggie, but itâs a very important step. You now need to figure out how much money youâve been spending each month on different areas of your life.
Grab a piece of paper, or open a new excel sheet and start by listing all your fixed expenses. This will be things like bills, food, travel, child care, education – anything that you have to pay each month.
Then think about everything else you spend your money on – eating out, going to the cinema, buying new clothes, etc.
Next, gather some recent bank statements and work out how much you normally spend on each of these categories. Note down the average monthly cost of each category.
It could look something like this:
Income = ÂŁ1,500 pm
Gas – ÂŁ20
Electricity – ÂŁ20
Council Tax – ÂŁ100
Water – ÂŁ30
Internet = ÂŁ30
Rent – ÂŁ700
Total Bills = ÂŁ900
Car Insurance – ÂŁ20
Petrol – ÂŁ50
Oyster card – ÂŁ30
Total Travel = ÂŁ100
Emergency Fund – ÂŁ100
Holiday Savings – ÂŁ50
Investments – ÂŁ50
Total Savings = ÂŁ200
Groceries – ÂŁ40
Eating Out – ÂŁ60
Total Food = ÂŁ100
Cinema – ÂŁ30
Shopping – ÂŁ100
Drinks – ÂŁ30
Total Entertainment = ÂŁ160
Total Outgoings = ÂŁ1,460 pm
Itâs very easy to incorrectly estimate how much money youâre spending, so itâs important that you donât miss this step. Keep on doing this until all your recent transactions are accounted for in a category. This exercise might take a while, but knowing how much youâve spent over the past couple of months will help you set a realistic and achievable budget.
*Tip: A budgeting app like Emma will automatically group your spending into set categories, which means you wonât have to manually calculate how much youâve been spending. Simply head to the âAnalyticsâ tab and click on âBudgetsâ in the top right corner and weâll show you your average spend for each category.
4. Think about how you want to spend your money:
Youâve written down how much youâve been spending. Now you should start thinking about how you really want to spend your money.
Review the list of all your outgoings and consider if youâre happy with your spending habits. Rank each of your spending categories by priority based on whatâs important to you and compare how youâve been spending so far. Add a new column to your list with the new amount you want to spend on each category.
For example, saving money could be a top priority for you, but you might find that youâre actually spending way more money on miscellaneous items than youâre adding into a savings account.
Using the budget above you might therefore want to change your spending targets so you plan to spend ÂŁ40 less on shopping, and add ÂŁ40 more into savings.
Thinking about your priorities in this way will help you spend more mindfully, and might also help you identify if there are any areas you can cut back on.
5. Compare your spending to your income:
By this point youâll know how much money you have coming in every month, how much money is going out each month and youâll have thought about any areas youâd like to change your spending habits.
Now you need to compare your budgets to your income. The example we have used above shows an income of ÂŁ1,500 and a budget that equals ÂŁ1,460.
If youâre in a similar situation where youâre spending less money than you earn, then you can now think about where to direct the extra cash (savings, investments, more freedom to eat out?).
If youâre spending more than you earn then youâre in a bit of a financial pickle. Review each category again and see where youâre overspending. The idea is to make sure that you’re spending less than, or equal to the amount you’re earning.
6. Write your budget down and then track your spending
After youâve written your budget down, youâre then going to want to track your spending throughout the month. Make a note of everything you spend by category and try to not go over your budget.
Itâs likely that your first budget will need amending a little, so make time to review it at the end of the month. After a few months youâll get in the swing of things, and budgeting will become second nature.
*Tip: Emma can help you track your spending. Connect your bank accounts and weâll automatically group your transactions into categories every time you spend.
Summary:
Here are our top tips on how to create your first budget. It might seem like a lot of work, to begin with, but there are a lot more pros to budgeting than cons. Youâll feel so much more in control of your money, youâll be spending on things that truly matter to you, and youâll have a much clearer picture of how to hit your big financial goals.
Weâd love to hear if you have any more tips on how to create your first budget. Get in touch by dropping us a message on Twitter, or joining the Emma Community.
