How to Create a Monthly Budget, With Emilie Bellet
Today, Emilie Bellet is diving into creating a monthly budget that truly aligns with your financial goals. Budgeting might seem daunting or restrictive, but it’s really about gaining control, achieving financial stability, and working toward your aspirations. We’ll cover how to analyse your income, understand your take-home pay, set up a saving plan (including a pension), and manage your expenses effectively.
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Step 1: Gather Your Financial Information
The first step in creating an effective monthly budget is gathering all the necessary information. This is probably what will take you the most time, and could be the most stressful if it’s the first time you do this exercise. We’ll base our budget on your latest full month of data.
If you're a freelancer or have variable income, it's a good idea to look at an average over the last three months to get a clearer picture.
You need to know where to find this information:
Check your bank accounts and credit card statements.
Print out your statements or access them through your banking app.
What about credit cards?
When handling credit card payments in your budget, it's important to treat credit card purchases as regular expenses for the month in which they occur. For example, if you buy groceries with a credit card in June, include that expense in June's budget. When the credit card bill arrives, consider the payment as a debt repayment rather than an expense. This helps prevent double-counting and provides a clear view of your spending.
Each month, ensure you allocate funds to cover at least the minimum payment due on your credit card to avoid penalties and protect your credit score. Aim to pay off the full balance to prevent interest charges, which can quickly add up. It’s also wise to regularly review your statements to check for any errors or fraudulent charges and adjust your budget as needed to reflect any interest or fees.
For example, if you have a £500 balance due from June’s purchases, budget for that amount in July under debt repayment. This approach ensures that you're not only meeting your financial obligations but also maintaining a clear and accurate budget that reflects your actual spending and debt management.
“Another method is the “zero-based budgeting method”. It gives your money a specific job, ensuring that by the end of the month, all income minus expenditures equals zero. ”
Step 2: List your income and calculate your “take-home pay”
Write down how much you earn, per month.
Whether you’re employed, self-employed or a combination of both, working out your take home pay after tax can be tricky.
If you have more than one job – your main job, side hustles, investments, or any other revenue streams add them to this list.
Make sure you’re looking at your take home pay, also called after tax income. This is the amount of money you have available after deducting taxes and other mandatory deductions from your gross income.
In the UK, you can find this information on your monthly or weekly payslip, which details your gross earnings and deductions for taxes, National Insurance, and pension contributions, leaving the net income figure.
Alternatively, checking your bank statements for your salary deposit gives you a clear picture of your take-home pay.
The HMRC Personal Tax Account online also provides comprehensive details on your earnings and deductions.
Additionally, end-of-year P60 forms and P45 forms from previous employment list your net income after all deductions.
You can also use online calculators like those from MoneySavingExpert or HMRC to estimate your income.
If you’re a freelancer, you will have to factor in taxes due to the often variable nature of freelance income:
Start by estimating your annual income and calculating your tax obligations, which typically include Income Tax and National Insurance Contributions (NICs).
A good practice is to set aside around 25-30% of your gross income to cover these taxes. This ensures you’re prepared for tax payments and avoids surprises. To stay organised, it’s advisable to transfer this estimated tax amount into a separate savings account each month.
If you expect to earn more than £125,140 a year, putting away 40%-45% should cover your tax bill.
Then deduct any money you have paid towards a private pension - I will talk about pensions later!
This figure will serve as the foundation for your monthly budget.
*In your spreadsheet, create two columns: one for the category (e.g., account, income source) and another for the amount.
Step 3: Categorise Your Expenses
Let’s now look into your expenses.
One of the most effective budgeting strategies is to categorise your expenses into 3 categories:
Needs (essential expenses): These are necessary for your basic needs, such as housing, utilities, food, debt repayments and transportation.
Wants (non-essential expenses): These are discretionary and can potentially be reduced or eliminated, like dining out, entertainment, giving and subscriptions.
Savings: This category includes money set aside for future needs, emergencies, or investment.
Start going through your statements and if on paper, you can start highlighting the different categories with 3 different colours.
Now you can start adding what you see on your bank statement to your notebook or spreadsheet according to category.
Calculate the total for each category and compare it to your income by dividing expenses / take home pay to see how much you’re spending in each area.
Look at the result:
Are your essential expenses taking up 50-70% of your take home pay?
What about non-essential expenses?
How much are you saving?
This will give you a clear picture of where your money is going and also of your financial habits.
Once you’re done with your own numbers, you could use a rule or benchmark - even if the benchmark should really be: how much do I want to allocate to my savings?
You will need to adapt them to your needs.
Today, we will be using a useful guideline called the 50/30/20 rule - coined by Elizabeth Warren (now a Democratic Senator from Massachusetts, then a Harvard Law School professor) back in 2006.
Allocate 50% of your take home pay for essential expenses, 30% for non-essential expenses, and 20% for savings and debt repayment.
But don’t take it for granted, at Vestpod I have seen people adjusting the rule, especially with high housing costs, starters / junior, living in big cities. You want to be agile and flexible. You may have to adjust the percentages. Also if you’ve been spending 70% on needs, this is where you start from. You can also give you some slack on the saving rate.
You need to determine what your own percentages are, for you to save for your goals, and also pay for your needs and wants.
If you decide to opt for this method (50/30/20 or any variation of it), consider automating your expenses each month. This means that your income is automatically divided at the beginning of the month in accordance with your rule.
Step 4: Have a plan
You need to give a job to your money. Now that you know where your money is going, you can work towards allocating it proactively! And your motivation and how you do it should come from setting realistic goals.
You want to be paying yourself first!
When budgeting, it's crucial to adopt the mindset of "paying yourself first."
This means prioritising your savings and investments before covering other expenses.
By doing so, you ensure that a portion of your income is consistently allocated towards your financial future, fostering a habit of saving and creating a financial safety net. A highly effective way to implement this strategy is by contributing to a pension plan.
Pay those debts, you pay for yesterday.
Start saving with an emergency fund.
Then look at short, medium and long term goals.
Then you can start building the roadmap for your money.
Take your budget to work towards these goals one at a time.
This helps you balance your needs, enjoy life today, and build a secure financial future.
Step 5: Review and Reflect on Your Spending
Take a moment to review your spending habits. Are there any subscriptions or recurring expenses that you can cancel or negotiate? It’s amazing how often we pay for things we don’t even use!
Checklist:
Cancel unused subscriptions
Negotiate lower rates on recurring bills or consider switching to cheaper suppliers when your contract is up using uswitch or compare the market to compare rates.
Identify areas to cut back without sacrificing quality of life
Check for duplicate or fraudulent charges
Review memberships and services
Impulse buys, especially on Amazon
Late fees!
Forget to return clothes
Explore budget-friendly alternatives for your regular purchases eg can you plan in advance to buy certain items you need on Black Friday?
Explore Your Relationship to Consumerism: Reflect on your spending habits and priorities / embrace principles of circular economy by choosing products and services that are durable, repairable, or recyclable/ consider minimalist practices to reduce unnecessary consumption and waste.
Another quick tip: To adopt a balanced approach to spending, consider this strategy: when you’re tempted to buy something, such as a £100 coat, put aside an equal amount into your savings. This way, every purchase is matched by a contribution to your financial future, promoting both responsible spending and consistent saving.
Once you’re happy with your current budget, we’ll work on planning for the upcoming month.
Just as a side note, as you go through your budgeting process, you might experience a range of emotions—guilt, empathy, and others. Whether this is your first time or a regular practice, remember not to judge yourself harshly. The past is behind you; focus on moving forward and improving. Establishing a solid budget now sets a strong foundation for the months and year ahead, and can truly be liberating.
Don’t compare your journey to others! I repeat this again and again but it’s key!
Step 6: Prioritise Your Expenses
With your expenses categorised, it’s time to prioritise them based on importance and impact on your financial well-being. Start by reflecting on your personal values and goals. Do you want to prioritise travel, save for early retirement, or fund a passion project? Your budget should reflect these priorities.
Allocate funds for your essential expenses first, ensuring that your basic needs are met. Then, set aside money for your financial goals, such as saving for emergencies, paying off debts, or investing for the future.
Another method is the “zero-based budgeting method”. It gives your money a specific job, ensuring that by the end of the month, all income minus expenditures equals zero.
Unlike the 50/30/20 rule, which allocates broad percentages to different categories, zero-based budgeting involves fine-tuning your budget to account precisely for fixed expenses, variable costs, and savings, down to the last pence.
Tip: Creating a budgeting contingency plan is crucial for managing the surprises life inevitably throws your way. To prepare, start by factoring an emergency fund into your budget, and an miscellaneous line.
Budgeting for Couples:
If you live with a partner, it's a good idea to budget together for the household. This might prompt some awkward conversations, but open communication and compromise are key. Discuss your individual financial situations, goals, and spending habits, and create a joint budget that covers shared expenses and individual discretionary spending.
If you have different incomes, consider dividing expenses proportionally. This ensures that the financial burden is shared fairly and prevents resentment. For couples with very different financial philosophies, seeking guidance from a financial counsellor can be helpful.
Remember, budgeting as a couple is about fostering open communication and shared responsibility in achieving your financial goals.
When to use technology?
Choosing between a budgeting app and an Excel spreadsheet depends on your needs and preferences. Budgeting apps like Yolt, Money Dashboard, and Emma are ideal for those who want convenience and accessibility. These apps integrate with UK banks, offering real-time updates and automated features like transaction categorization. They provide user-friendly interfaces with visual tools that help you quickly understand your spending habits and set financial goals. Apps are great for those who want to manage their budget on the go, without the hassle of manual data entry or complex setups.
On the other hand, Excel spreadsheets offer more flexibility and customization for those who prefer detailed tracking and analysis.
Step 7: Adjust and Optimise
After allocating funds for your essential expenses and financial goals, review what’s left for non-essential spending. Look for areas where you can cut back without compromising your quality of life. For example, consider more cost-effective entertainment options like hosting a game night or attending free local events.
Budgeting throughout the year varies significantly between seasons like summer and winter due to the distinct financial demands each period brings.
Summer typically involves higher costs for activities such as vacations, outdoor events,
Winter sees expenses rise with heating bills, holiday spending
Being agile in budgeting allows you to adapt your financial plans accordingly. By anticipating these seasonal fluctuations, one can proactively allocate resources, prioritise savings, and adjust spending habits to maintain financial stability throughout the year.
Step 8: Track and Adjust
Budgeting is an ongoing process. It’s essential to track your actual spending against your planned budget and make adjustments as needed.
Review monthly / quarterly or whenever your circumstances change.
This helps you stay on track and make informed decisions about your financial future.
Conclusion:
By following these steps and incorporating practical tips, you’ll be well on your way to creating a monthly budget that aligns with your financial goals. Remember, budgeting is not a one-time exercise; it requires discipline, commitment, and regular adjustments. Embrace the process, and you’ll gain a sense of control, financial stability, and the ability to achieve your dreams.
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PARTNER:
Thank you to our partner PensionBee. With PensionBee you can combine, contribute and withdraw online. Take control of your pension, so that you can enjoy a happy retirement and join over 240,000 customers saving with PensionBee. When investing, your capital is at risk.
RESOURCES:
Vestpod’s worksheet (make a copy or download it)
Listen to PensionBee’s monthly podcast, The Pension Confident Podcast to better understand the world of personal finance and pensions. Listen or watch the full episodes on YouTube. And if you’re a PensionBee customer, you can listen in the PensionBee app! When investing, your capital is at risk.
