How to budget money

If you've never been a budget fan, welcome to the holy grail. A well-structured budget that helps you save money serves as your financial roadmap, helping you achieve your goals, navigate uncertainties, and build a secure future. No matter what income you have, you can always set a budget for your personal finances to make the most of it.

In this article, we'll delve into the importance of setting a budget, how to determine your financial goals, the widely acclaimed 50/20/30 rule, the budgeting process itself, small yet impactful budgeting tips, and strategies to stay committed to your budget.

We’ll aim to show you how to budget on a low income, as budgeting is for everyone, not just people with spare cash. If you live with someone and want to split the finances, read my blog on how to split household bills. Likewise, if you’re in a committed relationship and want to pool your finances together to make the most of them without losing your independence.

If you’re serious about taking control of your finances, this will be your ultimate guide.

Let’s dive right in.

How to budget money – Why set a budget?

Don’t skip this part. So many people try to budget for things without taking the initial first steps, and that’s how it usually ends in failure. A budget is essentially a blueprint for your financial well-being. It empowers you to take control of your money, work towards a goal you want to achieve and gives you a sense of accomplishment. Whether you want to save for something in particular, reduce financial stress or save for your future; a realistic budget provides clarity, and enables you to make progress toward your short-term and long-term goals.

What are your financial goals?

Before embarking on the thrilling (ha) budgeting journey, it's essential to define your financial goals. Budgeting is hard, so the more solid your goals are for doing so, the more chance you have of sticking to them.

I always like to do an exercise where you break down your financial goals.

• List down your short term goals, such as buying a car, paying off debt, or building an emergency fund.

• List down your long term goals such as saving for a house deposit, or saving for retirement.

Only you can decide what’s short and long term based on your earnings. Don’t underestimate how long it takes to save, I wouldn’t put dates there just yet until you’ve assessed how much you can afford to save based on your income, this will come later.

Finally, write down the reasons you want these things.

This step can become a bit of an eye opener. Sometimes people do it, and realise they don’t know why they want these things, they just do. Budgeting for these types of things usually prove the hardest, if you can’t find a solid reason why you want the things you’re saving for, maybe you should be saving towards something else.

What is the 50/30/20 rule?

A popular budgeting guideline and a simple budgeting rule is the 50/20/30 rule – I started with this when I first began to budget and I can confirm it’s very effective. The idea is, you separate your earnings into three categories, or what I like to call 3 buckets.

You allocate 50% of your take home income to necessities (housing, utilities, groceries), 30% to discretionary spending (entertainment, dining out, hobbies) and 20% to savings (your long and short term goals). This rule provides a balanced framework for managing your income.

The rule is not the be all and end all, it’s a guideline. Other factors may come into play which we will talk about below, but you can use the 50/30/20 rule as a guideline. Firstly, dig into what you've spent your salary on in the last 12 months. Write down everything to get a true picture – going through your banking app and bank statements can help you to categorise if its a need, want or savings. Once this is done, you can decide how much you can allocate to each bucket. Also, remember when calculating this that you should start with your after tax income, not your full salary.

Now, as you’re probably aware, we are in the middle of a cost of living crisis, especially for my UK readers – I see you. Costs have shot up exponentially for food and energy in particular, so you may need to fiddle a bit with these percentages if you cannot afford everything.

Here's the 50/20/30 rule broken down.

Spend 50% of your money on needs

50% of your salary is advised to go to your needs (or things have you have committed to paying), such as rent, bills, gym membership, car repayments, etc. Basically all your living costs. After you've noted down all your spending and tallied up how much you spend a month, this can give you a rough idea of what you need to allocate to this bucket. It could be a good idea to add 10% to this, and use that as an average of what you need to allocate to necessities. The reason we add 10% is to avoid any nasty surprises, especially if you don’t have an emergency fund or are on variable rates for some bills.

Don’t forget to add in any repayment here for debts. Originally in the 50/20/30 rule, the debts repayment comes in within the savings department, but I strongly believe paying off any debts is a necessity. If you skip a debt repayment, it impacts your credit score; impacting your future line of credit. Paying off debt such as a student loan, bank loan, credit card repayment is definitely a necessity, so include it in this bucket. If you need to allocate a higher percentage to include this, that's okay. The percentages may not be bang on, like I said, use this as a rough guideline.

Spend 30% of your money on wants

This spending is 'life' spending, and there’s a reason it’s higher than the savings percentage allocation. As mentioned above, if you go too hard on savings your life could be miserable, so to keep you on the right track, allow yourself to spend money to enjoy yourself. If you can cut spending back to put more in your saving pot, great, but don’t force yourself to do it. This pot is for things like eating out, socialising, movie night; things for you – and we all know how important self care is.

A good rule of thumb is, set yourself this 30% allocation, then if there’s any extra money left at the end of the month, move this into your savings account.

Put 20% of your income towards savings

20% of your income can go towards your savings, assuming you have enough after you’ve covered all your necessities. If you can’t reach 20%, do as much as you can without making your life miserable. One of the biggest hiccups people face when trying to save is leaving themselves no money to enjoy life. They feel trapped, frustrated, and end up going out and blowing their savings in one go and are back to square one.

When setting the savings bucket goal, be reasonable. The important thing is to stay consistent in saving regularly over having a high amount getting saved each month.

You can split this further into a long and short term pot. If you're not sure what savings account is right for you, I've talked about the various types of savings accounts that can help you reach your goals if you want to keep your money in the bank.

Putting your buckets into action

Now you’ve set your goals and allocations, we can put your work into action. My number one tip is to automate your money to move where you want it as soon as your salary comes in.

I recommend having separate accounts for your buckets, so there’s no confusion of what goes where. This means having an individual bank account for each of your various buckets. Read my guide on the bank accounts everyone needs to organise their finances.

Action steps:

Step 1. Set up an automated allocation of the percentage of your salary you will need for bills into your ‘bills’ account. Next, set up all your direct debits to come out of this account and this account alone. If you have to pay anything manually, do it now via this account. A good tip here is to have this account with a debit card so you can pay online for anything you need to.

Step 2. Allocate your savings into a savings account, again, automatically. I would suggest choosing a high interest savings account if you can. If you need easy access to your money, the interest rate will be lower, so when looking at savings accounts it’s worth nothing the timeframe of when you will need to access your money. If you can afford to lock it away for a period of time, the interest rates will likely be higher. I explain the different types of savings accounts here.

Step 3. Automate your discretionary spending to go into another account, this can be your everyday account. I would suggest having a debit card for this as this is for your entertainment spending and you’d want easy access to it. At the end of the month if there’s anything left in here, you can move it to your savings. If you really have an issue with blowing money, you could set this account up to have daily spending limits.

Once everything is automatically allocated, you should monitor your spending every few days. Choose a bank where you can log in to the app to see your spending, this can help you see exactly what you spend most of your money on and also check your bills have come out of your account.

Tips on how to save money

If you’re like me and love a challenge, I always bet myself to have money left over from my discretionary account at the end of every month to move to my savings. I’ll admit, some months I went too far and ended up frustrated and blew a lot of it, so don’t jump in too deep or you’ll fall off the wagon. If you want to make small changes to your lifestyle to build up to having cash left over, here are some budgeting tips for you.

Meal prepping: I honestly cannot sing the praises of this tip enough. I’ve done meal prepping for years, not only to save money but to also stay healthy. If you can plan your meals and cook at home, you will save a bucket load of money. I’ve worked in corporate my whole career, in 2 major cities, and I am still shocked at the amount of people who order in or go out to eat every single day, calculating the money they spend on a daily/weekly/monthly basis in my head just sends me into a spin.

Imagine, lunch these days is minimum £5, and that’s an unhealthy meal deal plus snacks throughout the day, that’s £25 per week – for one meal a day. If you meal prep and make enough for two in the evening, you can take the same meal to work the next day, it’s cheaper to buy fresh and make it yourself than go out to eat. Trust me, after a few weeks of this you’ll see the difference in your spending, you’ll probably feel better, too.

Avoid brands: When food shopping, the branded things are almost always eye level with you on the shelves, and they always come with a higher markup. Look for the shop’s own brand, this will usually be a third of the price and the quality and taste will be very similar if not identical to the bigger brands. Save yourself some money and forget the well known name.

Shop mindfully: A friend told me once she had a 3 day rule. If she wanted to buy something, she would force herself to wait 3 days. If she still wanted it with the same ferocity that she wanted it on day 1, she would buy it. If she didn’t, she wouldn’t. Nine times out of ten she didn’t, and she had a shoe obsession, so imagine how much she saved.

Differentiating between needs and wants takes control, this is also why we suggested writing down why you wanted to reach your financial goals at the start of this blog. If you have a valid reason to be saving, this allows you to ask yourself if buying something you ‘want’ overpowers that reason as it could well shift you out of budget. Always realign with your goals and ask yourself if you really need to buy what you want, or if you can do without it for the sake of your long term goals. Stay focused.

Reward yourself: Budgeting is tough, I’m not going to lie to you, especially if you’re not used to it. Our human brains are designed to be rewarded when we do something good, so if you’ve had a good week at spending, don’t be afraid to treat yourself. For example with myself, I meal prep during the week and stick to it religiously, then at the weekends I go out to eat to treat myself. These little wins will keep you on track and stop you from falling off the wagon.

Budgeting is an essential tool for achieving financial stability and realising your aspirations. By setting clear goals, following the allocation rule, automating and tracking your budget, and implementing small yet impactful tips, you can take control of your finances. Remember, budgeting is a dynamic process, so stay flexible, stay committed, and watch your financial dreams become a reality.

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