how to budget
Why Budget Your Money?
A budget is simply your plan for how to spend less than you earn.
It shows where your money goes, helps you prepare for life’s surprises, and puts you in control of your finances.
Budgeting isn’t about saying no to everything, it’s about saying yes to what truly matters.
When you tell your money where to go instead of wondering where it went, you create freedom and focus.
It’s the first and most powerful step toward becoming debt-free and achieving financial stability.
What To Include In Your Budget
A good budget covers every part of your financial life from essentials to future goals. Here’s what to include:
1. Essential Payments
These are the non-negotiables that keep your life running:
Rent or mortgage
Utilities and council tax
Insurance and necessary household bills
2. Variable Expenses
These change from month to month:
Food and groceries
Travel and fuel
Childcare
Subscriptions or memberships
3. Debt Payments
Include any loan repayments, credit cards, or other financial obligations. Keeping them in your budget helps you stay on top of what you owe.
4. Spending Allowance
This is the money you can use until payday.
Within this, set aside a small ‘fun’ fund which is guilt-free money for treats or activities. Even when paying off debt, small rewards help you stay motivated.
5. Future Goals
Once your essentials, variable expenses, and debts are covered, plan where the rest goes, whether that’s savings, an emergency fund, or investments for the future.
Setting up your bank accounts in a clear, organised way can make budgeting much easier.
Having separate accounts for different purposes helps you see where your money is going and makes it less likely you’ll spend what’s meant for bills or savings.
Here’s one approach many people find helpful:
Essential Bills Account
Use one account just for your regular, fixed payments such as rent or mortgage, council tax, utilities, and insurance.
Because these costs are usually similar each month, keeping them in one place means you don’t have to manually set money aside.
Some people also prefer to have all these bills leave the account on the same day for simplicity.
You won’t usually need a debit card linked to this account.
Variable Expenses Account
Consider a second account for flexible spending like food, travel, and childcare.
These costs can change slightly month to month, so having them separate helps you stay on track without dipping into bill money.
Savings Account
Keep your savings in their own account so they’re easy to monitor and less tempting to touch.
This could include your emergency fund or other future goals.
Spending Account
This is your everyday spending money: the amount left after covering bills, essentials, and savings.
Keeping this money separate helps you avoid overspending and makes it clear how much you can use until payday.
How Many Bank Accounts Should You Have?
There’s no perfect number. The right setup is as many accounts as you can comfortably manage.
They can be individual or joint whatever fits your situation best.
use Sinking Funds
A sinking fund is simply money set aside regularly for a specific future expense.
It’s like giving every big event or cost its own mini savings pot so when the time comes, you’re prepared instead of relying on credit.
You might create sinking funds for things such as:
Birthdays and gifts
Christmas
Car servicing or MOT
Holidays or short trips away
For example, saving £50 a month for Christmas means you’ll have £600 ready by December without the stress or extra borrowing.
How Many Sinking Funds Should You Have?
You can keep individual sinking funds for each goal or use one combined account and track the amounts yourself.
Some modern banking apps even let you create separate “pots” or sub-accounts, each with its own target and purpose.
The key is balance: too many separate funds can become hard to manage, so choose a number that feels easy to maintain for you.
See Top UK Bank Accounts for Budgeting page for tools and apps that make managing multiple funds simple.
What To Remember When Setting Out Your Budget
Creating a budget that works long term means keeping things simple, realistic, and flexible. Here are some key points to keep in mind:
Be Realistic
Set a budget you can actually stick to. It’s better to start small and stay consistent than to aim too high and give up after a few weeks.
Keep It Simple
It’s easy to overcomplicate things especially if you’re using Excel or a budgeting app. Avoid complex formulas and focus on making your budget quick and easy to update.
Keep Your Budget Up to Date
Review your budget regularly. It only takes a few minutes each month. A good habit is to check it just before payday so you can adjust for the month ahead. Remember, your budget should evolve as your circumstances change.
Budget on Your Base Salary
Create your plan based on your normal, guaranteed income. Any extra like overtime, bonuses, or side income can then be used to boost savings, overpay debt, or go toward specific goals.
Plan for the Whole Month
Even if you’re paid weekly, it helps to plan your spending across the full month. Set aside money in advance for known events like birthdays, weddings, or car costs, so you’re never caught short.
Most Important – Have a Written Budget
Whether it’s on paper, in a budgeting app, or in Excel, writing your budget down makes it real. You can see where your money goes and track your progress clearly.
Budgeting Top Tips
Here are some simple habits that make sticking to your budget easier and more effective over time:
1. Automate Your Transfers
Set up standing orders for bills, savings, and investments to go out on or just after payday.
This way, your essentials are covered automatically then you can divide what’s left between debt payments, sinking funds, and spending money.
2. Review Your Past Spending
While a budget focuses on the future, it helps to look back.
Check your online banking and add up how much you’ve spent on things like takeaways or coffees over the past year. It can be eye-opening!
It’s not about cutting everything out, but about being aware of where your money really goes.
3. Assess Your Monthly Bills
Go through every outgoing and ask, “Do I actually need this?”
If the answer is yes, see if you can get it cheaper by switching providers or cancelling unused subscriptions. This can make a big difference.
4. Understand Your Spending Habits
Notice when you tend to spend more.
If weekends are your weak spot, plan for it. Allow yourself a set amount for social spending so you can enjoy it guilt-free without going overboard.
5. Be Ready to Make Changes
If your budget isn’t working, maybe you’re dipping into savings or using credit, something needs adjusting.
Start small, tweak what you can, and stay flexible. Progress comes from consistent small improvements.
6. Set Clear Financial Goals
Write down what you’re saving or working toward and rank them by priority.
And remember, don’t spend money before you actually have it in your account. Delays or lower-than-expected pay can easily throw you off track.
Use whatever system keeps you on track like apps, spreadsheets, or even pen and paper. The key is to stay disciplined and keep reviewing.
different types of budgeting
There’s no single “right” way to budget. The best method is the one you’ll actually use and stick with. Here are some of the most popular approaches:
The 50 / 30 / 20 Rule
You’ve probably heard this one before. It’s a simple guide suggesting you allocate:
50% of your income to needs (rent, bills, groceries)
30% to wants (dining out, entertainment, hobbies)
20% to savings or debt repayment
It’s a useful starting point but don’t worry if your numbers look very different. The percentages can be adjusted depending on your situation, especially if you’re focused on paying down debt or saving aggressively.
The Zero-Based Budget
With a zero-based budget, every pound you earn is given a job whether that’s bills, food, savings, or debt payments.
Income – Expenses = £0 (on paper)
This doesn’t mean your account is empty, just that every pound is planned for. It keeps you highly aware of where your money goes and helps eliminate waste.
Best for people who like structure and want tight control of their finances.
Cash Stuffing / The Envelope Method
This old-school method still works brilliantly.
You divide your spending money into envelopes (for example, groceries, petrol, eating out). Once an envelope is empty, you stop spending in that category until next month.
It’s ideal if you find it too easy to overspend with a card.
Modern versions of this system use digital “envelopes” through apps or online bank accounts that let you split money into separate pots.
Best for: Visual learners or anyone who benefits from physical or digital limits.
Hybrid Budgeting
You don’t have to stick to just one system.
Many people combine methods for example, using a zero-based budget to plan their month and the cash envelope method for variable spending like food or entertainment.
Others adjust the 50/30/20 rule to match their current goals (like 60/20/20 during debt repayment).
Best for: People who want flexibility and like to mix structure with simplicity.
Try out different budgeting styles for a few months to see which one fits your habits and personality. The right method is the one you’ll consistently use.
Managing Your Spending Money
How you manage your day-to-day spending can make or break your budget. These small habits help you stay in control and avoid that mid-month “where did it all go?” feeling.
Track Your Spending
This is one of the most important and often the hardest habits to build.
Get into the routine of checking your spending account regularly, even if it’s just a quick glance a few times a week or after each shopping trip.
If you constantly dip into savings to cover overspending, you’re borrowing from your future self and that’s a habit worth breaking.
Withdraw Your Spending Money as Cash
Instead of withdrawing all your money at once for the envelope method, consider just withdrawing your weekly or event-specific spending money in cash.
Having the physical notes in your hand helps you see exactly how much you have left as once it’s gone, it’s gone.
Manually Transfer Your Spending Money
If you prefer not to handle cash, you can transfer your spending allowance into a separate account weekly or even daily.
This helps you stay on track and stops you accidentally spending money meant for bills or savings.
Try Budgeting Apps
There are plenty of apps that automatically link to your bank account and track your spending in real time.
Some even send you alerts when you’re close to your limit or when you’ve spent too much in a certain category.
get into a payday routine!
Whatever budgeting method you use, setting a payday routine helps you stay organised and in control. Once everything’s set up, it should only take a few minutes each month and just a few quick checks and adjustments.
1. Review Your Direct Debits
Take a quick look through your direct debits and standing orders. Make sure nothing has increased without notice and that all payments are correct.
2. Watch for Anything Unexpected
Check your accounts for any unusual or unplanned charges. Catching them early helps you stay on top of your money and avoid surprises later in the month.
3. Look Out for Renewals
See if any fixed contracts, subscriptions, or insurance policies are due to renew soon. A change in cost could affect your next month’s budget.
4. Set Out Your Plan for the Month
Compare this month to last month and see if expenses have changed?
When you’re new to budgeting, things might change often, but once you’re on top of your finances, it’ll become second nature and take far less time.
Doing this routine every payday keeps your budget fresh, accurate, and stress-free.
Regularly Review Your Budget
Creating a budget is a powerful first step but reviewing and updating it regularly is where the real progress happens.
Life changes, and your budget should evolve with it.
Why Review Your Budget Regularly?
Stay aligned with your goals: As your priorities shift, your budget should follow.
Catch overspending early: Spot trends before they turn into financial setbacks.
Adapt to change: New jobs, rising bills, or lifestyle adjustments all affect your plan.
Celebrate progress: Seeing how far you’ve come keeps you motivated.
How Often Should You Review?
Monthly: Keep a close eye on day-to-day finances.
Quarterly: Step back and assess long-term goals.
After major life changes: Update immediately after big events like moving house, changing jobs, or making large purchases.
Tips for Effective Budget Reviews
Compare planned vs. actual spending to spot problem areas.
Adjust categories where you consistently overspend or underspend.
Add or update financial goals as they evolve.
Use apps or spreadsheets to track and visualise progress over time.
Regular reviews help keep your budget realistic and effective and remind you how much control you’ve gained.
Budgeting takes practice
You’re not going to be perfect at budgeting right away and that’s completely fine.
When you first start, it’s easy to feel frustrated if the numbers don’t line up or you forget an expense. But the truth is: no one gets it perfect from day one.
Budgeting is a skill, and like any skill, it improves with time and practice.
Expect Mistakes
You’ll underestimate some costs, forget about irregular bills, or overspend occasionally, that’s normal.
The key is to adjust as you go. Each month teaches you something new about your habits and priorities.
Track Progress, Not Perfection
Don’t aim for a flawless spreadsheet, aim for awareness.
The real goal is understanding where your money goes and gaining more control over it.
Stick With It
Keep refining your budget and making small improvements.
Over time, you’ll notice your financial confidence grow and managing your money will start to feel natural.
Budgeting for a car
Cars can be one of the biggest household expenses, so it’s worth taking the time to plan carefully before buying or upgrading.
Car Finance
If you need to finance a car, always compare the total cost of different finance options, not just the monthly payments.
In many cases, a bank loan may work out cheaper than dealership finance, but always do the maths to see which suits you best.
How to Budget for a Car
Here are a few general guidelines people often use when deciding what they can afford:
Try not to spend more than six months’ worth of wages on a car.
Keep car payments below 10% of your monthly budget.
Avoid buying a brand-new car unless you can comfortably afford to pay for it outright with spare cash.
A popular approach is the 4 / 40 / 4 rule:
Look for a 4-year-old car (past its biggest depreciation hit but still reliable).
Aim for around 40,000 miles (typical for that age).
If you’re using finance, try to repay it within 4 years.
And ideally, keep the car for 8–10 years, or until repair costs start adding up.
Avoid Finance When You Can
Once you’re in a position to, it’s worth avoiding car finance altogether.
A car is a tool for getting around, not a fashion statement and owning it outright means one less monthly bill to worry about.
Budgeting As A Couple
Money can be one of the biggest sources of stress in a relationship but it can also be a powerful way to work together toward shared goals.
Work Together with Your Partner
Even if one of you isn’t naturally interested in budgeting, it’s important that both partners understand the plan and agree on the bigger picture.
It’s fine if one person takes the lead in managing the numbers. What matters is that major financial decisions are made together.
Tried-and-Tested Approaches
The right setup depends on your situation, income levels, and what feels fair for both of you.
1. Split the Bills 50/50
Each partner pays half of the shared expenses (rent, bills, groceries, etc.).
Works well if you both earn similar amounts.
Can feel unfair if one person earns significantly less.
2. Split in Proportion to Income
Each partner contributes a percentage of their income toward shared costs so higher earners pay more, lower earners pay less.
Keeps things fair when incomes differ.
Can be trickier to manage if wages or hours fluctuate.
3. Combine Your Income
All income goes into one shared account, and all expenses come out of it.
Encourages teamwork, transparency, and shared accountability.
Can feel uncomfortable if one partner prefers independence or has different spending habits.
4. The Hybrid Method
Many couples find a balance by keeping a joint account for shared bills and separate accounts for personal spending.
Combines teamwork on essentials with freedom for individual purchases.
Requires good communication to make sure shared costs are covered.
Shared Goals Pot
Even if you don’t fully combine finances, consider a separate savings account for joint goals, like holidays, home deposits, or an emergency fund.
It keeps you working toward the same future, even if your day-to-day money is separate.
From Our Experience
When we first stared budgeting as a couple, we argued quite a lot and tried a few different methods, the best system is the one that helps both of you feel secure and respected and able to work as a team.
Disclaimer
The content on this website is for educational purposes only and does not constitute personal financial advice. Financial rules, tax laws, and market conditions can change, and outcomes will vary depending on your circumstances.
Before making any financial decisions about savings, pensions, investments, loans, or business ventures, you should seek independent professional advice. Past performance is not a guarantee of future results.
Links to third-party websites are for convenience and educational purposes only; we do not endorse or take responsibility for their content.
