This article was last updated on 24/10/2024
It’s been suggested that as many as 2/3 of the UK population don’t have a financial plan in place, with 16% having no savings at all. While organising your finances can seem like a daunting task, setting up and following a budget is fairly straightforward, and the first step towards financial security. Budgeting allows you to track your spending, and work out what you can afford to save comfortably. Follow our quick-start guide to creating a budget and find out how to boost your savings.
1. Work out how much you’re spending
Before setting yourself a budget, it’s important to make sure you’re not currently spending more than you can afford to. Looking through recent payslips, bills and bank statements will help you see exactly how much you’re spending, and what you’re spending it on. Although this may take a little while, analysing your spending is an integral part of building your budget. It’s crucial to identify the areas where you can cut back on wasted spending straight away.
2. Categorise your spending
Some of your expenses will be fixed every month, meaning you’ll have a good idea of what they’ll look like in advance. These may include utility bills, phone contracts and payments towards rent or a mortgage, for example. You’ll also have costs that are likely to differ month-to-month, such as the amount you spend on groceries and leisure activities like trips to the cinema and socialising with friends. Categorising your spending like this will help you work out what costs you’ll be able to cut down and redirect the money to your savings instead.
3. Automate your savings
With busy lives, and more distractions than ever, keeping a grip on your finances can be difficult. Thankfully, there are lots of apps that’ll do the hard-work for you. Whilst some offer a digital dashboard of your spendings, others will automatically top up your savings within a budget you’ve set. Automating your savings is a really easy way to get the ball rolling and will allow you to boost your finances while sticking to a budget.
4. Set realistic short-term goals
Having smaller goals to aim for can be a great thing to base your budget around
It’s sometimes difficult to see the benefit of putting money away if you’re only thinking about lavish long-term goals, such as paying off your mortgage or saving up for a wedding. Setting smaller financial goals will allow you to budget accordingly and think about where you could be stricter with your spending. These goals could be anything from saving for a day out with the family, to aiming to save an extra £50 a month. Having smaller goals to aim for can be a great thing to base your budget around and will help you get in the habit of putting money aside on a regular basis.
5. Consider your long-term goals
On top of your smaller financial goals, it’s still worth considering what your long-term goals are. Everyone’s ambitions will vary, but they’re often the big-picture costs. So whether you’re saving for a house deposit in the next few years, or just looking ahead to your retirement, you’ll need to budget appropriately. Understanding what your ambitions are, and when you want to achieve them, will help you to create your budget and map out your spending for the foreseeable future.
6. Create an emergency fund
When budgeting, it’s important to factor in an emergency fund. It’s recommended to have three months salary in an emergency fund in case any nasty surprises crop up. So don’t budget down to your final penny and make sure you’re leaving yourself with a buffer for this scenario. Setting up a regular payment towards your emergency fund is one way to make sure you’re putting money away and not spending too much.
7. Factor in special occasions
It’s important to reassess your budget throughout the year. Your income and outgoings may change and events like birthdays, holidays and other special occasions are likely to take you over an average month’s spend. Planning ahead for these and looking at where you’ll need more disposable income, can help you to adjust your budget in advance. So whilst it’s important to have a budget in place, it’s even more important to reassess what’s achievable each month so you don’t ever put yourself in a difficult situation.
8. Don’t neglect your pension
A pension is one of the most tax-efficient ways of savings
When budgeting, you also need to think about your retirement, and the income you’ll need once you stop working. A pension is one of the most tax-efficient ways of saving, with the government adding a 25% tax top up to all personal pension contributions. So although you won’t be able to access your money until you reach the age of 55 (rising to 57 from 2028), including pension contributions in your budget now will help you take advantage of the free money from the government, while planning for a more comfortable retirement when the time comes. If you’re unsure how much you should be saving, you can use our Pension Calculator to help you see if you’re on track for the retirement you want.
Risk warning: As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
