How to create an accurate budget

Budgeting is your best friend when it comes to anything money management-related. Be it saving for a holiday, applying for a mortgage, or simply freeing up some funds to avoid the financial stress that comes from a low bank balance at the end of the month. However, if your budget is inaccurate or a tentative reflection of your finances, it probably won’t help you manage your finances effectively and could be the reason your current money plans are in disarray. While you may know you need to work on your budgeting skills, you might be a little unsure about where to start or how to create an accurate budget.

Why is it important to budget?

The majority of your big and small financial decisions will rest on your view of your finances. By considering your current monies, your future commitments and whether the decision will affect those commitments, you are essentially budgeting. By having an accurate budget in place, these decisions become much easier to make because instead of guessing as to your ability to afford one-off or new regular financial responsibilities, you will know if you can afford them. Having a budget also helps you find ways to save to assist you with any large or unexpected expenses, which also means you can rely less on credit and have better overall control of your money.

Step by Step Guide to Budgeting

Creating an accurate budget is a relatively quick task, but it will take some effort if you want to do it properly. However, once you have formulated your budget, it’s quite quick to amend and update as your finances fluctuate.

Step 1: Check your previous bank statements

The first step to making an accurate budget includes reviewing previous bank statements to ensure the figures you are using are reflective of your actual circumstances. We would recommend taking an average of the last 3 months of statements, but if your outgoings change regularly or if your circumstances have recently changed to a new normal, you may need to look at more or fewer bank statements respectively. Grouping some transactions together can help keep the process simple. For example, instead of having individual clothes shops listed, consider categorising your clothes shopping as for leisure and for work purposes.

Step 2: Essential vs non-essential expenditure

Knowing which of your monthly payments are priority expenses helps navigate your budget as these are the costs that you can’t miss and must be paid over other expenses. If your income is low one month or you have an emergency payment to meet, you need to know exactly how much your priority expenses are so that you can work out whether you need to use your savings or even borrow to meet them. You may even find that you need to reduce your non-essential expenditure on a more general basis to ensure you can meet your priority bills consistently and with ease. Once you’ve allocated your income to your priority expenditure, your remaining funds are known as “disposable income”, and this is the money you can spend as you wish. Your disposable income often goes towards savings and repayments that exist outside of your typical financial commitments. While your disposable income is yours to spend freely, it’s worth making an effort to save some of it to help you with potential cashflow shortfall, or even to go towards things like holidays.

Step 3: Writing down your budget

Once you’ve divided your income and expenditure into categories, you need to figure out a way of keeping track so that month on month, you know exactly what your finances are doing. You may choose to buy a budget diary to keep track of your bills and upcoming expenses, or you might prefer more digital means like spreadsheets or even an online calendar to visually represent your payments. It doesn’t matter how you notate your budget as long as it’s a system that works for you. You may even want to use an online budget planner, but remember that you may have expenditure categories that aren’t included so you’ll need to add these in manually.

Step 4: Tips to keep your budget accurate

• Review your budget frequently – at least twice a year. This helps ensure that you stay up to date with your incomings and outgoings and means are more likely to cancel subscriptions and services that you no longer use.
• Remember your essential expenditure is likely to change in winter and in summer. You may need to budget for increased heating bills or increased social plans etc. While your overall expenditure might not fluctuate much, the allocation of those funds will probably change and it’s important you know exactly where your money is going.
• Actively add new financial commitments to your budget – even if it’s just a low cost subscription. Knowing how your money is committed each month will help if you want to make some savings by reducing your expenses.

Borrowing Money on a Budget

Sometimes you might need to borrow money and small loans can be a reasonable way to meet the demand, especially with online payday lenders making the process quick and easy. While there’s no shame in borrowing from time to time to maintain your cashflow, it’s important you add the additional repayments into your budget so that you don’t risk missing them. While credit can help you avoid financial difficulty, mismanagement can lead to bigger money problems and ultimately make credit harder to obtain in the future, when you might really need it. Part of having an accurate budget is being able to meet your repayments and bills on time consistently, which benefits not only your finances, but your mental and emotional health too.

Budgeting sustainably also reduces your need for credit as you are more likely to have savings in place to deal with emergencies and a small disposable income leftover each month in case something costs more than usual. If you do find you need to borrow money, however, always use a loan comparison website so that you know you’re not spending more money than you need to be. Good money management takes time and effort because it requires you to research ahead of making financial decisions. In the long run, this will help build your financial resilience.