How To Create A Budget (From Scratch)

Having a budget when it comes to controlling your finances is probably one of the best things you can do. When you know exactly what to expect coming in and going out, there are no nasty surprises and you don’t end up in your overdraft each month, or worse – using credit cards.

When you create a budget, it doesn’t mean giving up everything and having no money for anything. If your budget is too restrictive you won’t stick to it and you’ll drop the idea altogether as quickly as you implemented it.

In order for a budget to work effectively it needs to be realistic.

Before You Start

Record your incoming money

This is the easiest as realistically there won’t be that many transactions, particularly if you’re paid monthly. Grab your last few payslips and write down what you got paid and when. If you’re salaried and paid the same figure the same day every month great. If you’re paid weekly, get overtime, tips etc we want to get an average view of your income, so note down your pay plus tips/overtime etc for the last few weeks.

We also need to record any other reliable income e.g Child Benefit. Make a note of how much and how regularly you receive this money.

You might also like this post… Why an Emergency Fund is Important and How to Build Yours Quickly

Get hold of a good few months worth of bank statements

If you manage your bank account online, it’s easy to access your statements. If you still receive paper statements, grab your most recent – I would suggest the last 3 months.

Firstly we want to make a note of all the fixed payments – so Direct Debits and Standing Orders.

If you manage your account online you can probably access a payments page which shows you a list of your active DDs/SOs and the date/amount last taken – so for ease you can use this list as a reference.

If not, go through your statement highlighting all of these payments and make a note of them. You should note the date they leave your account, the amount and the reference. I also note whether the amount is fixed (e.g Gym £17.99 per month) or variable (e.g Mobile Bill (if you often have charges outside your allowance))

The reason I go through the last few months is because we often have quarterly DDs set up which we forget about (e.g. Magazine Subscription) or 4 weekly SO’s (e.g baby’s swimming lessons) and these can be easy to miss if you just look at one month in isolation.

When you are sure this list is complete, this will form the basis to create a budget.

You might also like this post… Why You Should Regularly Review Your Expenses

Create a Spending Diary

Be honest with yourself and track what you spend each month. For reliability you really need to do this for a whole month, but try it for at least a week. Try to keep receipts in case you forget to note it as you spend it.

Include everything – fuel spends, weekly food shops, top up shops, if you buy lunch at work, that morning coffee, the protein shake at the gym – track it all. You probably don’t even realise where most of your money goes, so how can you possibly budget for it otherwise?

Don’t forget online shops. If you get your food delivered. Those sneaky purchases from ebay and amazon. That recent ASOS haul. Document it all! If you withdraw a tenner here and there, write down where that goes too. Even the smallest spend, note it down. You’d be surprised how it all adds up.

When you have a clear view of where your money goes you’ll be able to create a budget effectively and know where you can try and save some money.

You might also like this post… My Thoughts on No Spend Days

Sinking Funds

If you haven’t come across this term, it basically refers to setting aside money to pay for a future bill.

It is good to have ‘sinking funds’ to cover annual expenses such as birthdays and Christmas presents, holidays and car insurance (if you paid off in a lump annually) and car maintenance.

These are things that don’t really sit within a monthly budget, but if you want to ensure you’re not caught short they’re worth thinking about.

Unless you keep excellent financial records already (in which case you probably already have a brilliant budget and don’t really need to be reading this blog post) chances are this section will be a bit of an estimate.

You need to write down a list of categories like suggested above and a rough amount that you spend in each. So say for example you have 10 people you buy birthday presents for – how much do you spend on them? £10 in a card for your friends son? £50 on Mum and Dad? Write it all down and add it up. This total will be your birthday sinking fund goal.

Do the same for the other categories applicable for you. Cars, clothes, haircuts, holidays, Christmas.

Decide whether you want to budget for these sinking funds, or whether you’ll allow for them in other areas of your budget.

It might seem overwhelming, and when you add it all up you’ll probably think ‘how the hell can I afford this?’… but if that’s how you’re spending now, you have to be honest about it in order to get the most out of your budget.

We really can’t try to save money, until we know how much we’re spending.

Creating your Budget

Once you have all the information gather, it’s time to start putting the budget together.

I’m a pen and paper girl – I work with spreadsheets, so I’m well versed in them too, but I just like seeing things written down. So I create both a computerised version and a written version of my budget (overkill maybe, but it works for me). Decide what better suits you.

I like to budget for each month separately for accuracy and for visibility. You can put a whole year into your budget spreadsheet if you want – again you want to find what works for you so you’ll stick to it. Personally I create a new tab for each month.

Keep it simple

A basic budget doesn’t need to be over complicated, you don’t need lots of formulas and columns or you’ll end up with information overload. Keep it simple to begin with. You can tweak it and add elements as you use it and find out what suits your life and finances.

Income minus Fixed Expenses

We know how much money you have coming in, and we have a list of the DDs and SOs.
Subtract the total expenses from your income. This will leave you with your disposable income.

Calculate your Variable Spends

This is where your spending diary comes in useful. Categorise your spending and add it up.
Personally I have 3 categories: Shopping, Fuel and Social.

You can decide how many and what categories are applicable to your budget and what goes where.

For me, ‘Shopping’ includes weekly food shops, top up shops, cleaning products, dog food, baby food and nappies. It doesn’t include lunch out, takeaways, coffee etc – that for me comes under social.

When we first made our budget, we were on average spending £70 a week on shopping and £50 on fuel, so I left the budget with those figures as is. We were spending a ridiculous amount on what we categorise as ‘social’ though, so I set that to £50 as well in order to try and rein it in a bit.

I work out how many weeks are in the current months payday cycle (some months it’s 4 weeks and some it’s 5) and add in my variable spends based on that.

So say we are in a 5 week month, my variable spends would be as follows:
Fuel £50 a week x 5 = £250
Social £50 a week x 5 = £250
Shopping £70 a week x 5 = £350
Total Variable: £850

What’s left?

In the example figures I’ve used above, we’re theoretically left £150 overdrawn. This means we are spending more than we are earning. I’ll look at ways we can improve this in my next blog post.

If we were left with a positive figure, you can then look at splitting your surplus over your sinking funds and/or transferring money to your savings.

Budgeting for Sinking Funds

You should have calculated your yearly spends on your specific sinking fund categories, so the next step is simply to break this down into a monthly amount.

For simplicity, take these figures and divide by 12 to get a monthly figure, this is the amount you want to transfer into another account to keep this money separate to your monthly spends.

Christmas £500/12=£41.67
Holiday £800/12=£66.67
Car £300/12=£25
Birthdays £200/12=£16.67
Total: £150.01

You don’t need separate accounts for each pot, you can record the split on your spreadsheet. You just need to keep it separate to the rest of your money. Obviously whether or not you hit your sinking fund goal in time for when the event happens depends on when you start it and when it occurs, but in it’s simplest sense it’s a pot of money set aside so you won’t be scrambling around for money or maxing out credit cards – it’s already taken care of (at least it will be partly)

Anything else

If there’s money left over after sinking funds, brilliant! You already manage your money well.
Transfer it to your savings, make an extra debt payment, treat yourself – it’s your money after all – you decide how it’s best spent.

Monitoring your Budget

We’ve worked out our income and fixed expenses, we know how much disposable income we’re left with and we’ve worked out how much of that needs to be allocated to variable expenses.

We’ve also worked out what we need to set aside for sinking funds, and how much (if anything) is left over that we can transfer to savings.

So what next? Well theoretically all the above is great, if that’s what happens in reality!
We need to monitor our budget to ensure that it does.

Tracking Your Variable Spends

Personally I have starting withdrawing the cash for my variable budgets and using the cash envelope system (which I will write about in a future post). But if you prefer not to use cash you need to find a method for recording your spends, so you know how much money you have left in each category so you don’t overspend.

You can simply write it down in a notebook and calculate a cumulative balance each time you spend:
For example:

Or, if you prefer you could use an app – I downloaded an app called ‘Pennies’ which allows you to create ‘pots’ and you can add in your spends and it’ll calculate what’s left for you.

Whichever way, you need to track what you’re spending in each category.

Checking Your Bank Account

Decide when and how often you’re going to check your account. I do this daily, but you could do this weekly. Tick off your budgeted expenses as they happen. This will highlight if any unexpected payments leave your account, which will allow you to adjust your budget if required. Or if you’ve over/underbudgeted for something.

Learn from any mistakes this month and tweak next months budget. As time goes on your budget will become more and more accurate, and checking your accounts/tracking your spends will become second nature.

Monthly Review

This isn’t strictly necessary but it can be helpful. What went well this month? Were any expenses unexpected or more than budgeted for? Did you budget too much for food shopping and can you cut this next month? Regularly reviewing and maintaining your budget ensures it stays efficient and effective.

I hope you’ve found this helpful, like I’ve said previously, this is how I do it and I find it works well for me. There are many different ways to budget, you need to find what works best for you and your household.