How to create a good personal budget

We’ve all heard this story in the personal finance community. Somebody draws up a shiny budget sheet full of formulas, dependencies and maybe even a pivot table or two, uses it for about a week and then decides their ‘budgeting phase’ was a flop.

This article will offer some of the most useful principles for budgeting which will help you to get your budget right from the get-go.

Let’s start with a short definition of what a personal budget should be. Think of it as a tool – the tool you use to direct your money where you want it to go, and also the tool which you can use to plan ahead and see your financial future clearly. The most common budget focuses on one month ahead – if you have some long term plans though, working with a whole year in mind is a good idea too. Every budget usually has three key categories: your income, your spending and your savings.

Budgets come in various formats: some people like a piece of paper and a pen, others prefer a spreadsheet and others use an app. My current personal budget uses a google sheet which means that it’s free for me to use and is accessible from whatever device I have to hand. Me first budget was a traditional pen and paper one. Yours should be whatever you are comfortable with.

Make it personal

Personal budgets are called that because they are in fact personal to you. While most contributors in the personal financial sphere will offer you a template that they are using, it is important that whatever you use reflects how you like to interact with documents daily. If you hate excel, you’ll need a different tool. If you love journaling, maybe pen and paper are a good starting point. Whatever format you choose, please ensure it’s one you don’t dislike.

But making something personal is not just the format of it. The content really is the important part. From person to person we all might have similar expenses, but in my case I could be spending £50 on cat food while you might be spending £50 on plants. Or nappies. Or ice cream…or whatever it is that you spend your money on. The only strong guideline I will offer here is that you should start your budget with drawing up three categories:

  • Your income – note down everything you make – income from any jobs you do that you know is coming in, any benefit payments, dividends etc. In short, whatever money you have coming in, take a note of it
  • Your expenses – starting with the most important ones i.e. the roof over your head, note out all the costs that you have to cover for running your house, feeding you and your family and getting you places. After you have these, also note down the things that are not bare necessities as line items like going out, buying clothes, travelling outside of your work commute and paying off debt etc.
  • Your savings – even if you don’t have any savings, have a category for these. After you subtract your expenses from your income, you’ll want to put any money available into your savings. Once you have a tight grasp on your budget and are possibly making additional income, you will be able to prioritise savings over expenses, but we can talk about that another time.

Make it realistic

A budget only makes sense if it is realistic enough for you to be able to follow it. One of the easiest ways to figure out how much you need to be budgeting for certain living costs is reviewing your spending from the last 3 months. While certain expenses like rent or mortgage payments, council tax and water rates are usually stable, costs such as electricity and ‘fun’ spending tend to vary a lot.

Before you put numbers down on paper, it is important that you check if they are realistic. As example, you might want to be spending no more than £200 on food at home per month. However, if you review your spending over last 3 months and it turns out that your family eats through £350 of groceries a month, £200 might not be realistic. On the other hand, if you are creating budget because you need to cut down on certain expenses, this review of your spending over the last 3 months can also help in setting boundaries. For example if you have found yourself regularly spending £60-£100 on a weekend night out and you find it unaffordable, it might be that you’re joining your friends for a couple of drinks instead of sit-down dinners next month, reducing your costs to £30 per week and retaining the difference elsewhere in your budget.

Make it easy to follow

For a while I had a budget which split every little expense out and listed about 12 different sinking funds. However, 3 months in I found it unwieldy. Do I truly need separate spending categories for general food, treats, pet food and household cleaning supplies? In my case, no. It all goes into one ‘groceries pot’. Similarly, with going out, takeaways and discretionary spending, in my case I have just one amount per month allocated to all 3. In your case, consider how detailed you want to be in reconciling this budget. Is it easy for you to divide up paying for tickets to lido for the whole family from the food you might have bought for them while you were there? If yes, have ‘activities’ and ‘eating out’ categories. If not, maybe ‘family outing’ which captures both and the cost of that pool floatie is enough?

Personally for me, the easier the budget at a glance, the easier I find it to follow. I’ve set my spending and saving categories out in a way that matches my way of thinking about the costs of them and you should do that too. And if you find yourself struggling to reconcile something, you can always adjust how you categorise things in your budget to make it easier to follow.

Make it accessible from wherever you are

You have made your budget to your liking in terms of format and easy to follow in terms of content. Now think about how you’re going to consult it when you are out and about. If it’s in a digital format, can you access it on your phone through an app or online? If it’s a paper one, can you put it in your pocket when you leave the house?

I honestly have a terrible memory and because of that I don’t always recall how much I have left in, let’s say, my ‘gifts’ category for the month. To save myself from spending more than I’d like to, I simply whip my phone out and check how much I planned to spend. If the gift is within range, great, I can get it. If it’s not, I’ll look for something else just as good but at a better price.

Regardless of how good your memory is, you might also want to take notes of your spending as you go directly in the budget. This is something that I always wanted to do but I’m just not habitual enough about it to stick to…maybe you can do better. Making it your habit not only lets you stay really close to your money plan, it also makes spotting any potential financial issues and reconciling your budget much easier.

Make it important

Last but not least, your budget should be important to you and there are many reasons why. But sometimes just ‘why’ is not enough, so in addition to the reasons I am including situations in which I have used the budget to my advantage:

  • You made a plan for your finance and your budget is the tool which you can use to safeguard that plan. As example, we all (in the UK) have that one friend who always wants to go drinking. And sometimes I don’t want to see their face – budget gives me a good reason to say ‘no’ without being offensive. A simple “sorry mate, it’s not in my budget, so maybe next time” is less controversial to “I don’t want to see your ugly mug today”. This applies to most situations which involve RSVPing to events you have no desire to participate in.
  • Your budget helps you achieve your financial goals. You might have heard this before – a budget is a plan for your money. You can safely assume that your budget’s job is to act as your personal map to your financial goals. And while there will be some people who are against budgeting, wealth or just anyone doing better than their peers, having a budget and sticking to it is the first step in reaching your goals. One of my big desires for few years was to buy my own house. Once I started budgeting, it only took 6 months to gather enough for a deposit – all because I had an actionable plan for that goal.
  • Your budget teaches you to be mindful about how you use your money. I used to have a terrible habit of impulse-buying small things daily, a bar of chocolate, a coffee, sometimes a pair of socks. None of these were needs, they were just things I did to kill time. Only after I started budgeting I realised that every month £50-£60 just vanished from my life with nothing to show for it. What a waste! Having a budget made me stop and think about whatever I was about to purchase and opened the door to a much more mindful shopping pattern which I use now.

Starting a budget and sticking to it might seem daunting, especially if you are struggling financially right now. However, I hope that this article convinces you to give it a go and try for yourself. Happy money-planning!

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