9 Building your budget
It’s time to start building your budget. Before you do so, watch this short video which sets out the simple steps involved.
Transcript: Video 2 Building your budget
While you need to make a budget that works for you, there are some key rules you should think about before starting.
- Make sure the time horizon is long enough to capture all your income and spending. Working to just a weekly or monthly budget may miss spending on holidays, gifts or annual insurances.
- Start your budget with your income before moving on to your expenditure. Only include income that is certain or at least likely. This way, anything on top is a pleasant surprise.
- Break down your spending as far as possible. This will help you see exactly where your cash is going if you find you need to rein in your spending.
- If you’re not sure how much something will cost (e.g. your phone bill) it’s best to overestimate and have cash to spare, rather than underestimate and not have enough.
- Divide your spending between ‘essential’, ‘desirable’ and non-essential’ – as per the activity you completed in the previous section. This really helps if you need to cut back on what you spend as you can start by trimming non-essentials.
- Add in an amount for unexpected spending, e.g. to cover replacing household goods that break down. Having this emergency fund for unexpected expenses means you don’t have to resort to panic measures (like borrowing on a credit card).
It makes sense to have an annual budget, but also to break it down month by month.
The annual budget will present you with that high-level picture of your finances and whether over the course of the year you are spending beyond your means (bad news!), or living within your means and potentially able to save up (good news!).
The monthly budget will help you manage your day-to-day money, indicating if this is a month of heavy spending (e.g. December, with its Christmas spending for most people) or a month of light spending (e.g. February, which is a short month when people do not tend to go away on holiday, when Council Tax is not normally payable and when the Christmas bills have been paid). These monthly snapshots will also highlight when you might have to draw on savings to cover a month of heavy spending or place money in savings when the monthly spending is relatively low.