A Step-by-Step Guide to Budgeting for Beginners

Posted on: 9th December 2024 in Financial Planning

Budgeting might sound intimidating, but it’s actually a simple and powerful tool to take control of your money.

Whether you’re saving for a dream holiday, tackling debt, or building a safety net, a budget helps you stay on track. Think of it as a map for your money—it shows you where it’s going and helps you decide where it should go.

This guide will walk you through seven easy steps to start budgeting today.

Step 1: Determine Your Monthly Income

First, figure out how much money you’ve got coming in every month. This is your income after taxes, known as your net income. Include your salary, side hustles, and any other steady sources of cash.

Knowing your total income gives you the foundation for your budget. Remember, it’s better to underestimate than to overestimate slightly. This ensures you don’t spend money you don’t have.

Step 2: List Your Monthly Expenses

Next, write down everything you spend money on each month. Split these into two main categories:

• Fixed Expenses: These stay the same every month, like rent, loan repayments, and insurance.
• Variable Expenses: These can change, such as groceries, entertainment, and utility bills.

Review your bank statements from the last few months to make sure you don’t miss anything. It’s easy to forget small purchases, but they can add up quickly!

Step 3: Categorise Your Expenses

Now, organise your spending into broader categories. Examples include housing, food, transportation, and leisure. This step helps you understand your spending habits.

Are you spending more on takeaways than groceries? Is your entertainment budget bigger than your savings? Categorising expenses makes it easier to spot areas where you can cut back.

Step 4: Compare Your Income to Your Expenses

Here’s where the magic happens—compare your total income to your expenses.

• If your income is higher than your expenses, congratulations! You have a surplus. Consider putting this extra money towards savings, paying off debt, or investing.
• If your expenses are higher than your income, don’t worry. It just means you need to make adjustments. Start by cutting back on non-essential spending, like eating out or subscription services.

The goal is to ensure your expenses don’t exceed your income.

Step 5: Choose a Budgeting Method

There’s no one-size-fits-all approach to budgeting. Choose a method that suits your lifestyle and financial goals. Here are a few popular options:

• Zero-Based Budget: Give every pound a purpose. Your balance should be zero once you’ve allocated all your income to expenses, savings, and debt.
• 50/30/20 Rule: A simple formula where 50% of your income goes to needs (like rent and bills), 30% to wants (like dining out), and 20% to savings or debt repayment.
• Envelope System: Withdraw cash for different categories and keep it in labelled envelopes. Once an envelope is empty, that’s it—no more spending in that category!

Experiment with these methods to find what works best for you.

Step 6: Track Your Spending

Creating a budget is just the beginning—you also need to stick to it! Tracking your spending ensures you stay on course.

You can use budgeting apps, spreadsheets, or even note expenses in a notebook. The key is to record every purchase, no matter how small. Regularly reviewing your spending helps you identify problem areas and adjust as needed.

Step 7: Review and Adjust Your Budget Regularly

Life happens—your budget should adapt to changes in your circumstances. Got a pay rise? Great! You can save more or pay off debt faster. Had an unexpected expense? Adjust your budget to accommodate it.

Review your budget monthly to ensure it still aligns with your goals. This regular check-in keeps you motivated and in control.

Additional Tips for Budgeting Success

• Automate Your Savings: Set up automatic transfers to your savings account. Paying yourself first makes saving effortless.
• Build an Emergency Fund: Aim to save three to six months’ worth of essential expenses. This gives you a financial cushion for unexpected events.
• Be Realistic: Don’t set overly strict limits that make budgeting feel like a punishment. Allow some room for fun—it’s all about balance.

The more you practise

Starting a budget doesn’t have to be overwhelming. Following these seven steps will give you a clear picture of your finances and feel more confident managing your money. Remember, budgeting is a skill—it gets easier the more you practise.

Why wait? Start your budgeting journey today and take the first step towards a brighter financial future. You’ve got this!