How to set a budget

Last week, we worked out our monthly income and outgoings. This week, we’re working out a budget, looking at how we manage our disposable income. Read on to find out how to set a budget.

How to set a budget that really works

How to set a budget that really works

1. Identify your monthly disposable income

This is what you have left after your ‘set’ payments. You may work this out either weekly, fortnightly or monthly, according to how your income and bills work. Most bills and income works monthly, so that’s how I work.

2. Identify your essentials from your disposable income.

These are the things that you buy rather than pay a set amount for, but that you need. So for us, that’s groceries and petrol. There are a few other things that we allocate a set amount for, but these are the essentials. We can’t get through the month without food and transport!

It’s really helpful to have a month’s worth of receipts for this, or to look back through your bank statements for an average month, and identify a rough amount that you usually spend. I try to keep the amount I spend on groceries and diesel fairly low, but I know that I’d rather save money elsewhere than on buying poor quality food.

Fix a set amount for these essentials. You can identify it weekly if you like, but monthly is easier. If you do work it out weekly, remember that a month isn’t 4 weeks – it’s slightly more. So to find your monthly amount, you need to multiply your weekly amount by 52 and then divide it by 12.

3. Open an account for these essentials.

This is probably my most important point in how to set a budget. Open a new account just for these essentials and put the allocated amount into it. When you buy those essentials, only spend from that account.

There isn’t a limit to the amount of bank accounts you can have. I’m not talking about having thousands, I’m talking about having a main account (which your income goes in to) and a separate account for your essentials. We have a separate account which I put our budget for food and petrol into. Whenever we buy groceries or petrol, we pay for it from that account.

We bank with Natwest (this isn’t an advert, I just find they’ve been really good). I have the app on my phone, and I can really quickly see how much we have in our current account, our savings and our ‘essentials’ account. It’s even labelled on the cards we have – ‘Main’ and ‘Groceries.’

4. Decide on how much you will save and set up a standing order.

We will talk about savings later on this month, but it’s at this stage you probably want to identify how much you want to save. The best way to do it is to set up a regular standing order so you barely notice the money leaving your account!

5. Identify your other regular purchases

It’s taken me a while to get to this stage. I used to skip straight to the next stage, and then wonder why I was spending so much more than Tim. Quite simply, it was because I took more responsibility for things like birthday presents, children’s clothes, shoes, household purchases and so on. Things that, really, are ‘joint’ purchases.

So now, I allocate an amount of money for things that we might consider ‘family’ purchases. These include gifts, household objects, car maintenance and clothing. I don’t put this amount into a separate account, because it does fluctuate a bit from month to month, but I do allocate it onto a spreadsheet.

6. Work out what you’ve got left!

Now you’ve worked out your bills, your essentials, your savings and your joint purchases, look at what you’ve got left. You might be surprised by this. You might realise you need to make some adjustments elsewhere. It might be time to have a sit down with your family and have a serious discussion. Or perhaps you’ll realise that you can afford to save a bit more, or put a bit more towards paying off a loan.

The best thing to do with this amount of money is to work it out according to a weekly amount. So, if you’ve got £250 ‘spending money’ each month, you’ll want to multiply it by 12 and then divide by 52. It gives you £57 to enjoy each week.

Even better is to take the amount out of the bank. In the above example, you’ll need to take out £50 rather than £60! Then you only spend that cash each week.

7. Keep tracking your spending

I don’t do this every month, but I about 4 or 5 times a year, I create a spreadsheet and track every single thing we spend throughout the month. I’m often amazed at how easy it is to fritter away money and end up with pretty much nothing to show for it, and this really helps to rein our spending in.

8. A final note on giving

It is completely up to you where you work out how much you will give to charity. Many people will put this as an ‘essential’ whereas others will take it out of their weekly allocation. Either is absolutely fine.

So there’s my guide to how to set a budget. If you’re ready for the next step, pop over to my next post to find out How to pay off debt.


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  • This is great Naomi. I’ve made a spread sheet with our budget, but I’ve noticed we definitely go over on food every month. I think I need to tweak the budget and I love the idea of having a separate account to put that money aside. I am going to try that next month! x