Budgeting basics: How to get off to a good start

It’s that time of year again: Christmas has eaten away at your wallet and January is shaping up to be a bit more frugal than you usually like to be.

Maybe you’ve got something you need to save for on the horizon – a big birthday, a holiday, a new car – or maybe you just want to get control of your finances ASAP so you can afford to set aside some money for the luxuries.

Whatever the case, there’s never a better time to start a budget than in the New Year, so we’ve put together our 6-step guide to help you get started. Scroll down for our tips on how to start a budget and our picks for 3 budgeting plans that might work for you.

Let’s dig in!

1. Get organised

A successful budget is a realistic budget. While it’s easy to take an educated guess about your regular incomings and outgoings, this can lead to mistakes and you could end up with a budget that isn’t fit for purpose and leaves you out of pocket when you need it most!

Take the time to gather the paperwork you need to get a thorough view of your finances. This can include wage slips, bank statements, mortgage payments, utility bills, credit card bills, receipts, and any other information about money either going in to your accounts or out of your accounts on a regular basis.

These days, much of this paperwork is actually online, so you might want to open up several different tabs on your laptop or mobile. If you’re not so keen on the idea of flicking between a dozen tabs, you can always print things out to have the physical copies to hand instead.

Working out a precise budget usually isn’t a 10-minute, whizz-through job, so make sure you set aside enough distraction-free time to get your head around the numbers. At least an hour is a sensible amount of time for most people.

We recommend sitting down at a desk or table with all your paperwork, a pen, a pad, a calculator and a cuppa.

2. Work out your after-tax income

Now let’s get to the numbers. The first step to getting your finances in order is to know exactly how much you’re working with in the first place, so you’ll need to work out your after-tax income.

For employees

If you’re on a company’s payroll and PAYE system, then the good news is this step should be straightforward. Check your payslip. Your employer will automatically deduct income tax and National Insurance from your pay for you, as well as any other outgoings such as student loans and workplace pension contributions.

Look for your ‘net pay’, which is the amount of money that actually goes into your bank account and you’re able to spend. Don’t forget to keep a note of your tax, pension and/or loan contributions too – you might not see this money go in or out of your bank account, but it’s useful to understand where your total income is going, how your retirement savings are shaping up, and your progress on repaying any debts.

For self-employed

If you’re self-employed, working out your after-tax income is a little bit different. You’ll already be paying tax to HMRC via a Self-Assessment Tax Return every year, so you’ll need to use this and subtract your tax payments from your total income to get the exact figure.

As a general rule of thumb, make sure you set aside a certain amount of your income every time you get paid to put towards your tax contributions, or you could find yourself scrambling to pull together enough when it comes time to file your annual tax return! If your income varies then you may find it helpful to use previous tax bills to estimate a sensible amount to set aside ready for tax return season.

For everyone

Your post-tax income doesn’t just start and stop at PAYE and Self-Assessment forms though! Remember to include any additional money you earn from other sources, such as from investments or property, to get an accurate view of your total income and the different avenues they come from. 

3. Review your spending

Now we’re into the nitty-gritty – spending. It’s often easiest to split your spending into two categories – essential and non-essential – to get a good sense of the minimum you need to get by and the areas you might be able to cut back on.

Essential spending

Make a note of how much of your after-tax income is spent on essentials every month and break them down into categories, so you can get a good idea of where your cash is going. 

Include mortgage or rent payments, utility bills, credit card bills, mobile contracts, groceries, childcare costs, travel expenses, and anything else you consider to be a non-negotiable expense in your daily life. The stuff that keeps the lights on. Check your bank statements and bills to make sure you’re noting the precise numbers.

Once you’ve calculated how much you spend each month on essentials, subtract this number from your monthly after-tax income to see how much you have left as disposable income to spend on the non-essentials.

Non-essential spending

This is often the most eye-opening part of building a budget. Now that you’ve reviewed your essential spending and calculated what you have left to spend on luxuries, it’s time to work out if you’re living within your means – and if aren’t, where you can afford to cut back.

A good way to add up your non-essential spending is by looking back at previous bank statements, starting with regular payments such as savings contributions and subscription services, then working your way down to ad-hoc spending on things like clothes, takeaways or nights out.

If you find that your non-essential spending is creeping over what you’ve calculated for your disposable income, then you’ll need to make a decision about what you can go without or reduce to a lower amount.

For example, you might stumble across an unused subscription service that you forgot to cancel months ago, which you could cancel and save yourself £10 a month. Or maybe seeing it all laid out in front of you helped you realise you spend too much money on buying new clothes or takeaways!

Decide on sensible – and realistic – adjustments to your spending that you can stick to and see how much you could save. You might want to set more aside each month for your savings, for example.

4. Set realistic financial goals

Now you’ve got a good sense of your incomings and outgoings, you need to decide what it is that you’re budgeting for. Maybe you’re saving up to put a deposit on a house. Perhaps you’re working towards buying your first car. You might be looking for ways to boost your pension or even just become more responsible with your day-to-day spending.

In any case, it might be handy to think of your financial goals in one of two ways: short-term and long-term goals. Short-term goals should take a maximum of 3 years to achieve and might be things like setting up an emergency fund, paying off credit card debts, or going on a luxury holiday. Long-term goals have a much longer timeframe and are often along the lines of buying your own house or saving for a comfortable retirement.

Knowing what you’re budgeting for is helpful not just because it gives you a specific, measurable goal to work towards, but because it helps you to stay focused and committed to your budget in order to achieve what you want. If you’ve got some money to spare, a financial adviser may be able to help you identify your financial goals and the best way to achieve them.

5. Choose a budgeting plan

Once you’ve got your budget and your goals, you’ll need to decide on a budgeting plan that works for you. There’s a huge range of budgeting plans out there to follow, and really it comes down to a matter of preference. Here’s 3 that we think are simple and straightforward:

The jam jar approach

This tried-and-tested budgeting plan was popular when we all used cash a lot more than we do now. Traditionally, you would use your calculations for how much you need to spend on specific categories – e.g. rent, groceries, travel – and you would fill a jar with that specific amount of cash inside it at the start of the month. All you’d have to do when it came time to pay that expense was to use the money you put inside the jar. Simple.

Nowadays, most of our spending is done digitally, but you can still replicate the jam jar method by using mobile banking apps such as Plum, Monzo and Starling. These allow you to allocate your money to savings “pots” or “spaces” which function just like a good old jam jar, only virtually.

Whether you use cash or manage your money online, the jam jar approach can help you to set individual, mini budgets for different types of expenses and can stop you from dipping into the money you intended for a particular category to spend on other things.

The 50:30:20 method

If the jam jar approach isn’t your style, then the 50/30/20 rule might be more suitable. This budgeting method revolves around one basic rule of thumb – 50% for needs, 30% for wants and 20% for savings.

As you’ve already calculated your after-tax income and your typical spending habits, following the 50:30:20 method should be quite straightforward. All you have to do is set aside 50% of your after-tax income for your “needs” - things like your rent/mortgage and groceries; 30% for your “wants” - such as takeaways and saving for a holiday; and 20% for “saving” - simply put, your savings account contributions.

Similarly to the jam jar budgeting approach, you may find it helpful to use mobile banking apps to help you follow the 50:30:20 method. You can utilise the various savings pots and spaces for your “needs”, “wants” and “savings” to help you keep track of them all and make sure your spending is closely aligned to the right ratio.

The pay yourself first system

Finally, the pay yourself first system is a popular way of making sure you achieve your financial goals while also keeping up with day-to-day outgoings. This one is pretty self-explanatory and involves putting money into your savings as soon as you get paid before you start paying the bills.

When you get your monthly payslip – or if you’re self-employed, whenever you get paid – you put aside a portion of the money you’ve earned into your savings first. The idea is that you’re able to keep prioritise working towards your financial goals, such as buying a house or retirement, rather than being left scrambling for cash to put in your savings at the end of the month after you’ve already spent most of it on other things.

The pay yourself first system, also called “reverse budgeting”, is a great way of making sure you stay on track to achieve your goals and don’t get tempted to spend the money you wanted to put towards them on lots of other little things over the course of the month.

Remember that if you’re not sure which budgeting plan would work best for you, a financial adviser may be able to suggest the most suitable one for your unique situation and goals.

6. Track your progress

The last – and the most important – step in nailing the basics of budgeting is to stay consistent. Make sure you keep track of your progress – even if it’s just with good old-fashioned pen and paper – so that you can stick to your plan and make adjustments if any unexpected expenses rear their ugly head (hello, "check engine" light!). If you’re comfortable with using tech then make use of the dozens of budgeting apps out there on the market to keep your budget in the palm of your hand, and if you fall off the wagon, try not to be too discouraged. Just start fresh the next time you’re paid and you’ll be on your way to your financial goals in no time!