Know your income and outgoings

It sounds blindingly obvious, but before you decide how to budget your money, you’ll need to know exactly how much you bring home in the first place. If you have only one job and a regular monthly wage you’re pretty much sorted – your salary slip will tell you everything you need to know. But don’t forget additional sources of money coming into your account, including child support and benefits.

If your income is variable – for example, money from side gigs, overtime, a business income or money from investments – then it’s slightly trickier to pin down a figure. Most experts advise noting down the bare minimum you receive each month (the amount you can pretty much guarantee) rather than listing speculative stuff that doesn’t always come off. If it’s easier, consider paying yourself a regular ‘salary’ (what you typically earn each month) to build your budget around, and save anything you make that’s over and above this.

Then it’s time to turn your attention to how you spend your money. It’s impossible to know if a budget is realistic without tracking outgoings, and it’s generally advised to do this for at least 30 days to get a fair picture of where your finances go.

The old-fashioned way is to use a spreadsheet or notebook to help, although jotting down every single purchase is necessarily time-consuming. By contrast, budgeting apps, linked to your bank accounts, take most of the hard work out of this, and there are plenty that offer basic functions for free.

If you want to get started on your budget straightaway, then studying old bank statements is a good solution. This too, however, takes time – trawling through the paperwork, categorising transactions and totalling each category. Which is why WorkLoan offers a service called FinFit – a free budget report using Open Banking to do the graft automatically for you. FinFit (short for Financial Fitness) looks at your transactions (income and outgoings), categorises them and adds them up. It will help identify things you may be able to cut back on and, where national statistics are available, show how you compare with others.

A particularly attractive feature for too-busy-to-budget types is that these reports present your expenses graphically, so you can quickly see where your money goes and where you can economise without poring over individual transactions.

Decide what you really need

The key to budgeting is being able to differentiate between your needs (stuff like food, mortgage repayments, rent, basic utilities, fuel, insurance and loan repayments) and wants. In terms of the latter we’re looking at things like dinners out, presents, holidays and cinema trips – the ‘fun’ stuff. We’re certainly not asking you to ditch the good times altogether, but being aware of how much you spend on luxuries could help you find ways to cut down and focus efforts on saving cash instead.

TIP: Sometimes, it’s not immediately clear if a purchase falls into the ‘needs’ or ‘wants’ category. A good suggestion is to try and live without the item in question for a month or so. If it becomes patently obvious you can’t do without it, there’s your answer.

Bear in mind, too, that even ‘needs’ can have an element of indulgence attached. Say you really need a car for work and dropping the kids at school… Does it have to be a brand-new Audi Quattro or could a more modest secondhand Kia serve your purposes just as well? Even if you can afford a car loan, think about the interest attached to it and how much the loan will ultimately cost to pay off.

Finally, if you suspect that the majority of your ‘wants’ are nothing more than impulse splurges, consider leaving your debit or credit card at home when you’re next trawling the malls. This doesn’t mean you’re banned from buying ‘wants’ whatsoever – rather that you use the trip out to see what takes your fancy, and then return again a week or so later (once you’ve had time to reflect if it’s going to fit in your budget), to actually buy it.

Set realistic goals and put your plan in action

As we said above, budgeting money doesn’t have to mean denying yourself the occasional splurge. The most successful budgets are those that set realistic targets rather than aiming for too much at once.

A simple budgeting template is the 50/30/20 rule, where 50% of your income goes on ‘needs’, 30% on ‘wants’, and the remaining 20% is filtered towards your budgeting goal – whether that’s savings-orientated or geared towards paying off a debt.

Even in this framework, you can allow for movement. If your ‘needs’ come in at over 50% of your income, for example, consider dipping into the ‘wants’ pot to cover them and adjust your spending accordingly. Or, if you want to reach a savings target or repayment faster, trim down the ‘wants’ ratio from the start, and divert this to the cause.

If you’ve struggled to save in the past, you may want to use one of the many monthly savings calculators online to get an idea of what the future value of your deposits will be. With so much focus on what you’re cutting back on, it’s nice to balance that with a preview of how things will hopefully pan out, and interest earnings you stand to make on top.

One more thing…

“You’ve started, so you’ll finish” – to paraphrase the popular Mastermind catchphrase. Once you’ve put your plan into action, the best way to stay on track is to update and review it routinely. Keep an eye on your bank account throughout the month for any glaring differences between what you budgeted for and what’s been actually going out. The more you do this, the more habit-forming it will become.

Another good way of staying on the straight and narrow, especially if you’re new to budget management, is to start off with a ‘cash-only’ plan. Withdraw what you’ve allocated to spend at the beginning of each month, and you’ll have a more tangible idea whether it’s working by how much is left in the pile, week by week.

If you find your motivation dipping at any point, remember the reason you want to save – a deposit for a house, a family holiday, a wedding, to have a financial safety net. Visualising the end goal, and then marking off your progress towards it with a debt or savings poster (in which you incrementally colour in your success saving up or paying something off), can provide timely boosts.