The Budget Planner

How to manage your money

how to budget

The problem with most budgets is they don't work! While they look at a typical month's spending, what about birthdays and other one-offs? This guide on how to budget includes a free budget planner which analyses your finances to help you manage and control your cash.

In the uncertainty of the current coronavirus pandemic, making sure you budget correctly is more important than ever. If you're struggling with household bills, we've a dedicated Coronavirus Finance & Bills Help guide.      

In this guide

Why should you budget?

Micawber - a moneysaver before his time

A budget done correctly is a very precise tool for analysing your finances. It answers two key questions...

1. Do I spend more than I earn?

An instinctive assessment is easy – if you're eating up your savings or building up debts, you're likely to be overspending. Yet before you can address this it's important to get an accurate idea of the size and scale of the problem.

Spending more than you earn is nothing new – in the 19th century Dickens' Mr Micawber spelt out the problem:

Annual income twenty pounds, annual expenditure nineteen six, result  happiness. Annual income twenty pounds, annual expenditure twenty pounds six, result – misery.

Major overspending can lead to a debt spiral and severe problems, that's why the Budget Planner is designed to  give you a definitive assessment of your finances.

2. What can I afford to spend?

Once you know where you're spending, you can start to alter and prioritise what you do with your money to enable you to stick within your means.

But while the budget planner includes ways to enable you to work out how to prioritise within your means, the real difficulty is sticking to it. The Piggybank Technique is designed to help you do just that.

  • It's often said "In debt? Do a budget!""Skint? Draw up a budget!""Wife run off with the milkman? BUDGET!" Yet while budgeting is seen as a solution, unfortunately most budgets are worthless.

    The main problem is that because they concentrate on a typical month, they massively underestimate your real spend, as this misses huge costs such as Christmas, summer holidays, new sofas or getting a new car.

    Broad categories like "motoring" make it too easy to forget the small expenditures that add up. Instead, "motoring" should cover MOTs, new tyres, petrol, insurance, breakdown cover and more. Hopefully the budget planner counters that by having nearly 100 separate categories.

Free budgeting spreadsheet: assess your finances

To help you budget, we've got a free downloadable spreadsheet where you can detail all your income and outgoings.

Read the tips below to help you fill in the spreadsheet, then choose one of the two available versions of the tool: an Excel or Open Office version if you prefer spreadsheets, or a good old fashioned printout.

Please read the tips for filling it in below before starting the planners.

  • Doing the budget planner accurately should take a couple of hours. Don't let that put you off though, think of it as detective work and the chance to discover where those pennies are disappearing to. It's best if you start by gathering together your bank and credit card statements, preferably the last three months' worth. Between them they should list all standing orders and direct debits and give you an accurate idea of what you spend.

    For example, for food shopping, gather together all your receipts (if you don't have them, look back through your bank statements) for the last three months, add up all food spending listed, then divide by three to reach your average monthly spend.

    Check your payslips to establish exactly what you earn, plus any bills or other documents if possible (though your statements should also detail this info).

  • It's very important to be consistent when budgeting. First decide who you're filling it out for: is it just for you or is it for your partner/family too? Finances often can't be separated in which case you should sit down and do it together.

  • It's tempting to try to fool yourself by underestimating your expenditure. This is a MoneySaving sin... and you will be punished. Try to be accurate, and, if you're not sure, guess larger not smaller – that way you'll have cash left over and not be short.

    Some types of spending overlap into different groups; be careful not to count expenditure twice. For example if you've included your car insurance in the motoring section, don't include it again under insurance.

  • The credit card section is designed for you to enter the cost of repaying your existing credit card debts. Don't confuse this with spending where you simply use your credit card and pay it off IN FULL.

    The best way to explain this is with an example. Say you spend £500 each month on food shopping using your credit card, but then pay off your bill in full. This spending belongs in the food shopping column and not in the credit card column as, otherwise, you'll be counting it twice.

  • If you contribute to pensions by cheque or have a payment from your bank account each month, it should come under the expenditure section.

    However, if your pension comes straight out of your salary as a payroll payment, don't include it as, when you fill in the income section, you should just fill in the net amount of pay you receive after all deductions.

  • When you go on holiday, you'll have expenditure while you're away; but you also don't spend on the things you normally would. So you may want to reduce the amount you put in your holiday category by a little.

    For example, say you normally spend £100 per week on food shopping and £30 on petrol. If you're abroad for the week, you won't spend this but you'll still be adding them in to your budget. Therefore if the holiday costs £700 and you intend to take £300 spending money, you may be tempted to put £1,000 in – but actually you're saving £130 of normal expenditure so it should only be £870.

What your result really means...

in the green arrow

Well done you!

Providing you've been honest with yourself, it's time to relax a little – but MoneySaving doesn't stop there. In fact it's just the beginning. Paying less for things means you have more money in your pocket to enjoy life more (and possibly save some for the future too!).

Savings from doing this could be £3,000 - £5,000 a year. My estimate is it'll take a full day's work... but look at the return. It'll be the best paid work you've ever done. The whole MoneySavingExpert site is dedicated to doing this in every area of your lifestyle, but to get started read the Money Makeover article.

in the red arrow

Don't run the risk of a debt spiral – sort it now!

Spending more than you earn may not seem like a big deal, yet it's a potential disaster – and not just financially. At best you're eroding your savings; at worst, you'll need to borrow.

Such borrowing is also the worst as it means you can't afford your lifestyle and thus there's no planning to the debt and no end in sight. Sadly, I've seen this result in debt crisis too many times, and that doesn't just hit your pocket: it can hurt your home, family, mental health and relationships.

You may feel this is over-dramatising. But when there's no money left and you can't borrow more, and the creditors are asking for money back which you've no ability to repay, it touches every element of your life. This danger is what's called a 'debt spiral'. It works like this:

debt spiral

Many people fool themselves about this, a common thought being: "That doesn't happen to nice families like us". Well, I'm afraid even if you're middle class, you're not insulated from debt. In fact you're in the prime category for debt crisis. It's crucial to take the blinkers off.

Far too many people in work with good salaries have big debts. If your non-mortgage debts exceed half your after-tax salary, it's a real issue.

What to do if you've got an overspend...

There are a number of simple steps to go through to try to reduce the amount you're overspending.

Step 1: Pain-free savings – cut bills without cutting back

revisit your budget planner

This is about ensuring you live the same way but pay less to do so. It's pain-free as no lifestyle changes are needed.

Don't just look at the obvious things like credit cardsenergy bills and mortgages. You can save on things like childcarecouncil tax and your supermarket shopping too. To go through this in detail use the full step-by-step Money Makeover guide, which shows you how to look at everything.

Step 2: Rebudget with what you expect to save

Now, it's worth revisiting your budget planner, incorporating your new predicted expenditure based on the expected pain-free savings. What you do next depends on the result...

Step 3: Painful savings – cutting back

You need to spend less, do less and sell things until you are living within your means.

  • Easy lifestyle changes make huge differences, just check out The Demotivator to see the real impact of small spending. Cutting out your £2.50 weekday coffee could reduce your annual expenditure by more than £600. Add newspapers, magazines, cigarettes, chocolate, parking and more, and savings mount rapidly.

  • Ask yourself two questions for every aspect of your life...

    Do I need it? If I do, could I do it more cheaply?

    This may mean having the self-discipline to cut out cinema trips and expensive Christmases, half-compromises like switching Sky for Freeview, or stopping costly holidays abroad in favour of holidaying at home.

    See the stop spending guide for full help.

  • If you're asset rich but income poor, then consider flogging things you don't use or need. Of course these sales are one-offs, but hopefully you can use the money to repay debts or get your savings back together.

    It could include selling things like a car or motorbike, working through your wardrobe and getting shot of old clothes (see the eBay sellers guide), or selling old mobiles. If you've got it and don't use it, consider flogging it.

  • If things are so grave that even this doesn't touch the sides, it's likely you're in serious debt and need urgent guidance. Visit free non-profit debt crisis agencies like Citizens Advice BureauStepChange Debt Charity or National Debtline as soon as possible.

Piggybanking: The trick to budgeting

Doing a budget on paper is easy, the difficult bit is sticking to it. That takes either strong discipline or a decent technique. We can't help you with the first, but Martin has a simple, but powerful method to help you take control of your spending. It's called piggybanking.

There are two key facts you need to understand before you start to budget properly.

  • Your bank account lies. When you check it, it shows you a simple snapshot of the scene that day. Less obvious is what payments are due in or out and when direct debits are paid, let alone when you need to go shopping. Never think that having cash in your bank account means your budget is balanced. By contrast,  being overdrawn is definitely a good indicator that it isn't.

  • To get back on track, your finances must lead your lifestyle, not vice-versa. Many people look for the cheapest way to do something and consider that to be MoneySaving. Yet if you're overspending, it's more important to curtail that – meaning that you're spending within your means.

    Let's clarify this with an example. People often get themselves into trouble at Christmas time by asking "how do I have a great time, with a big tree, all the family round for dinner and hi-tech prezzies for all the kids on the cheap?"

    This is a bad question. It establishes your priorities without reference to how much money you've got. The right question to ask is "What can I afford to spend this Christmas?", and then plan your activities around that.

The Piggybank Technique

piggybank method

The piggybanking technique helps you automate your spending so you always know how much money you can truly spend.

It's easy to do:

Step 1: Select your main categories of spending

The aim is to have your books balancing – so you're not spending more than you earn. To do that, you need to work out how much you can spend on different areas of your life. You can use the "Part C – Monthly desired spend" column of the Budget Planner to do this.

Once that's done, you need to scan through to see what the major categories are. This could be holidays, wedding saving, Christmas, clothes, birthdays, hobbies or whatever you spend on. If you're self-employed, you should always have a tax account. Pick four or five at most.

Step 2: Set up several 'bills' accounts

Now you know how much money you want to spend on different items, the aim is to make it as simple as possible to know how much cash you have available.

  • To do this, set up a number of different bank accounts, each with money in it for a different purpose, so the money's effectively in little pots (almost as if you're putting them in different piggybanks). You should always have a main bank account and a separate bills account. Then pick the biggest three or four of your main spending categories above for the others.                                                                                                                

    A simple example of five accounts:

    • Bills (including mortgage)
    • Big purchases (sofa, car, kitchen)
    • Holidays
    • Christmas
    • Savings & emergency fund

Step 3: Use a standing order to feed the piggies

Now feed each of the piggybanks – including the bills account, which you should always overestimate slightly – from your main account. Set up standing orders to shift the right amount of cash each month.

As an example, if you allocated £800 a year to spend on Christmas (the typical amount for a UK family), you would put £67 a month into a Christmas account, so it builds over the year.

Tip: Schedule this for two days after getting paid, not for the same day – just to give you a little bit of room in case there are any payment problems.

The result: Now your bank account(s) tell the truth

Now when you look in your main account, you know it really shows how much you have to spend, as all the money for bills and other key areas has been shifted out.

Plus if you see a £700 holiday, but there's only £400 in your holiday account, you now KNOW you can't afford it and can cut your cloth accordingly.

Piggybanking account suggestions

  • This is the centre of the whole strategy. So make sure it's a good one, and that you find its website or your nearest branch easy and convenient to use. Of course, ensure it's paying you well, too. See our full Best Bank Accounts guide.

  • It's best to use a current account for bills, as it's likely you pay most bills by direct debit – and most savings accounts don't allow that. So, if possible, ask your current bank if you can set up a second account.

    If not, you need to find a current account that either doesn't require a minimum pay-in, or at least doesn't charge you if you don't pay in its suggested minimum (provided you still get basic features). Usability is more important here than any perks.

    Interest isn't that relevant, as the amount of cash you'll have in it should be relatively limited as money in bills accounts tends not to stay there too long once paid in.

    Don't just take how much you pay for each bill at face value – you can try to reduce these spends by haggling. See our guide on haggling.

    If you have an account you use for piggybanking that works well, please let us know.

  • For your other piggies, it's best to use savings accounts (or even a cash ISA), where you can earn some interest. By doing this you won't always be able to get your cash out at the same speed, but that isn't always a bad thing.

    If you do need quick access to cash, then the easy option is to use an instant access savings account that's linked to your main bank account. This will allow you to sweep cash across when needed. Make sure it's available even if you've only £1 in it, and check how often you can withdraw your cash.

    Remember to check once a year to see if your rate has dropped. If it has, ditch the accounts you opened, and switch to ones paying higher interest. For more savings options, see Top Savings Accounts.

    Once you've piggybanked the cash you need for bills and other spending, it means whatever you've got left in your main bank account is actually spendable each month.

    The other benefit is that you really know how much money you have to spend at Christmas or to go on your holiday – there's no fooling yourself anymore.

    It's perfectly possible the end result of this is that you can't afford the holiday you wanted. But more importantly,  you won't spend what you can't afford and wind up in the debt spiral.