Creating a realistic monthly budget is essential for managing your finances, but it can often seem like a daunting task. It’s important to understand the ins and outs of creating a budget in order to stay on track with your spending and saving goals. That’s why we’ve created this step-by-step guide to creating a realistic monthly budget for those living in the UK. This guide will help you get started with creating your budget, offering helpful tips along the way.
Gathering financial information
Before you can create a realistic monthly budget, it’s important to gather all of the necessary financial information. This means gathering all of your bank statements, credit card statements, bills, receipts and any other financial documents you have. Make sure you have at least the last three months’ worth of information available to get a good idea of your monthly income and expenses.
Once you have all of your financial information in one place, it’s time to organise it. You can do this manually or use an app or budgeting software to help you out. Whatever method you choose, it’s important to make sure you can easily track your income and expenses and get an accurate picture of your finances.
Identifying income sources
Before creating a budget, it is essential to identify all the sources of income you have. This includes not just your regular salary or wages but also any other sources of income you may have, such as bonuses, commissions, rental income, and side hustles. Make sure to gather all relevant documents, including bank statements and pay stubs, to accurately estimate your monthly income.
If you have a variable income, such as in freelance or contract work, it is crucial to create a realistic estimate based on your past earnings. You can also use a conservative estimate to ensure you have enough buffer in your budget to cover any dips in income.
Once you have identified all your sources of income, add them up to get your total monthly income. This figure will be the starting point for creating your monthly budget.
Listing expenses
Once you have identified your income sources, it’s time to list all of your expenses. This includes both fixed and variable expenses. Fixed expenses are regular payments that stay the same each month, such as rent, mortgage, or loan repayments. Variable expenses, on the other hand, fluctuate from month to month, such as groceries, entertainment, or utilities.
Start by writing down all of your fixed expenses, along with the amount due each month. Make sure to include any quarterly or yearly payments that you need to make, such as car insurance or council tax. This will help you to see how much of your income is already accounted for.
Next, list your variable expenses. This can be a bit more challenging as these expenses may vary from month to month. To get an accurate picture, try to estimate how much you usually spend in each category. Use your bank statements and receipts to help you remember all of your purchases. It may be helpful to divide your variable expenses into categories such as groceries, eating out, transportation, entertainment, and personal care.
Remember to be thorough when listing your expenses, even if they seem insignificant. It’s easy to overlook small purchases, but they can quickly add up over time. For example, a daily coffee from a cafe may only cost a few pounds, but it can add up to over £50 per month.
Once you have listed all of your expenses, add up the total amount. This will give you a clear idea of how much money you need to cover your expenses each month. If your expenses exceed your income, you will need to adjust your budget accordingly. Look for ways to cut back on your spending or find ways to increase your income.
Allocating money for savings and debt payments
Once you have identified your income sources and expenses, it’s time to allocate money for savings and debt payments. This step is crucial in achieving financial stability and security in the long run.
When it comes to savings, it’s important to have a goal in mind. Whether it’s building an emergency fund or saving for a down payment on a house, make sure you have a specific amount to save each month. This way, you can easily track your progress and adjust your budget accordingly.
Debt payments, on the other hand, can take up a significant portion of your budget. If you have multiple debts, it’s important to prioritise which ones to pay off first. High-interest debts such as credit card balances and personal loans should be paid off before tackling low-interest debts such as student loans.
One popular method for allocating money for savings and debt payments is the 50/30/20 rule. This rule suggests allocating 50% of your income for necessities such as rent, utilities, and groceries, 30% for discretionary expenses such as dining out and entertainment, and 20% for savings and debt payments.
Remember, it’s important to stick to your allocated amounts for savings and debt payments each month. This will help you make progress towards your financial goals and avoid falling into more debt.
Reviewing and adjusting the budget regularly
Creating a realistic monthly budget is not a one-time process. As time goes by, your financial situation may change, and you need to adjust your budget accordingly. In addition, your budgeting skills may improve as you gain experience, and you may find new ways to cut costs and save money. Therefore, it’s important to review and adjust your budget regularly to ensure it remains accurate, effective and reflective of your current financial status.
The frequency of your budget reviews and adjustments depends on your personal circumstances and preferences. Some people prefer to review their budget monthly, while others prefer a quarterly or biannual check-in. Whichever frequency you choose, make sure to put it in your calendar and treat it as a non-negotiable appointment with yourself.
During the budget review process, go through each category of your budget and compare your actual spending to your projected spending. If you notice any discrepancies, identify the reasons why they occurred and determine if there are any areas where you can reduce expenses. Perhaps you need to cut back on eating out or cancel a subscription service you don’t use anymore. Alternatively, maybe you’ve been doing a great job of sticking to your budget, and you have extra money left over that you can allocate to your savings or debt payments.
Don’t forget to consider any changes in your income, expenses or goals when adjusting your budget. For example, if you get a raise or start a new job, you may need to revise your income projections. If you’re planning to take a holiday or make a big purchase, you may need to adjust your expenses to accommodate these costs.
Remember, the key to successful budgeting is flexibility and adaptability. Be open to making changes to your budget as your circumstances change, and don’t get discouraged if you need to make adjustments along the way. With a little patience, practice, and commitment, you can create a realistic monthly budget that helps you achieve your financial goals and live within your means.