How To Budget: The Basics

Where To Start?

Before you’ve even thought about how to create a budget, you need to start at the very beginning.

The first step is the hardest.

Look at your bank statements. Look at them in full. Look at every payment coming in and out of your account. Make a note of all the payments you made and where your money went in the last month. Really get down to the nitty-gritty.


You want to know the total you have going in and the (actual, real, honest) total you have coming out.

This goes beyond rent, petrol and bills. If you see a pattern of payments coming out – £18.99 monthly for the gym, £22.00 every Friday at work’s local, £5 at Sainsburys every night on the way home – these are going to be worth putting into your budget. Beyond your fixed monthly costs, these are the payments that make up your quality of life.

Now you’ve faced the music. You’ve seen the worst there is to see and you can plan for a brighter, better financial future. It’s time to thrive.


A Basic Budget Split

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Now you’ve figured out exactly how much is coming in every month after tax, you are better prepared to plan how that money should be spent in the coming month.

If you’re not sure how best to split your income, a good strategy to start with is the 50 / 30 / 20 method. (link to 50 / 30 / 20 blog post).

Devised by a Harvard bankruptcy expert, this method ensures you are able to cater to your needs, whilst still paying attention to your wants and your future.

50% of your monthly income should go towards your ‘needs’, which accounts for rent, food, utility bills and making minimum debt payments. Essentially, these are the payments you need to make to live. You need a roof over your head, you to pay the bills, you need to eat, you need to get to work, and you need to make the minimum payments on your debts. Everything else can wait.

30% of your income should go on your wants – sounds like fun, right? However, your wants include your gym membership, the phone bill, your Netflix account alongside any socialising you want to do that month. So, these are non-essential payments that are also sort of essential to having fun / a better quality of life.

Which leaves 20% of your income to go towards ‘savings’. This will change depending on your financial situation. If you’re in debt, use this portion to pay off your high-interest debts first, whilst maintaining the minimum payment on the others. If you’re already up to your eyeballs in savings (lucky you), you can think about investing this money and securing your future finances.


Think of budgeting as a guideline, rather than a hard and fast rule. Much like diets, budgets work best when you find what works for you. 

Perhaps use the 50 / 30 / 20 method for a few months whilst you get to grips with sticking to a budget and then use your findings to adapt the percentages to suit your needs.


An Investing Budget

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If you’re a seasoned budgeter or want to find new ways to make more money or invest your money to make more money – this style of budget is for you.

The percentages are flexible and each section can be scaled up and down depending on your financial goals and needs.

The bulk of your income (about 50-60%) should go to fixed costs. This includes rent (or mortgage), utilities, phone bill, car payments or travel payments, loans, food shopping, essential clothes, internet, and other things like that.

Dedicate 10% of your income to investments (after taxes). This could be peer to peer investments to earn around 5% return or an innovative finance ISA to earn tax-free interest. See the risks of investing your capital to see if it works for you.

Set aside around 5-10% for your savings. The specifics are really up to you and depend on what you’d like to do in the future. Think about saving for things like going travelling, a deposit on a house, a wedding, and unexpected expenses.


The last category is for guilt-free spending. Everyone needs a little fun money

This includes covering expenses like bars, movies, taxis, games, and whatever else you like to blow your hard-earned cash on.



A Scalable Budget

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Once you’ve mastered the basics, it’s good to know what your budget could look like in a different circumstance.

Whether it’s a pay rise or redundancy, a dramatic change in your income shouldn’t come as a shock to you.

Look at what your monthly income would look like on double the salary – what areas would change?

Should you put more towards paying off your debts or would you splurge on more wants? If your salary were to double, it’s important to note the return rates you could get for investing more at the time.


When you have a particularly flush month – whether that’s due to a bonus, inheritance or a sudden windfall – treat your budget as if it’s the best case scenario. Use your money according to how you’d noted you’d scale up to avoid temptation in other areas.

Also, look at how you would budget should your salary decrease.

If halving your salary does not provide you with enough to live on, scale your income down to the lowest possible amount that would allow you to live. From here, work out how you would split that amount – it will highlight the areas that you deem appropriate to scale back on an average month if you want to save more.

You can use this scaled-down model of budgeting when you need to reign it in on months that are particularly tight to keep yourself afloat.


How To Budget: The Basics – Key Takeaways

  • Before you create a plan, you need to find out exactly how much income you have a month after tax and how many outgoings you have to pay out in order to live.
  • The basic budget focuses on three main areas: Your fixed costs (rent, bills etc), the costs for things you want (eating out, festival tickets, gym pass etc), and the amount you should be saving.
  • The investing budget focuses on the three original areas plus investment so you can secure your financial future and make more money on top of your income.
  • The scalable budget allows you to be flexible when making decisions on how to split your finances. Knowing the lowest you could possibly make in order to live will highlight the areas you can scale back on. Planning what you’d do with double the money will keep you in check when you have sudden windfalls of money.

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