A budget can look like a wall of figures. In practice, a handful of numbers tell you most of what you need to know: what comes in, what has to go out, what you choose to spend, and how much protection you have if something goes wrong.
This guide takes you through six of them, one step at a time. You will need your last two or three months of bank statements, a calculator and about an hour. Work them out once and you will have a clear picture you can come back to whenever life changes.
Step 1: Work out your net income
Start with take-home pay, not your salary. Net income is what you receive after Income Tax, National Insurance, pension contributions and any student loan repayments have come off. Your payslip shows it, or you can read it straight from your bank statements.
Add any other regular money coming in, such as benefits, child maintenance or pay from a second job. If your income goes up and down, because you work shifts, earn commission or are self-employed, use the lowest of your last three months as your starting point. Budgeting on a good month is how shortfalls sneak in.
Step 2: Add up your fixed costs
These are the payments that go out every month for roughly the same amount:
- rent or mortgage
- council tax
- gas, electricity and water
- insurance
- phone, broadband and TV packages
- childcare and travel to work
- subscriptions and memberships
Add them up, divide the total by your net income and multiply by 100. That percentage shows how much of your pay is spoken for before you buy a single thing. If it is very high, these bills are often where the biggest savings hide, for example by shopping around at renewal or cancelling subscriptions you no longer use.
Some costs only turn up once a year, such as a car service, the MOT or a TV licence. Total their yearly cost, divide by 12 and count the result as a monthly fixed cost. That way they stop catching you out.
Step 3: Track your variable spending
Variable spending is everything that changes from month to month: food, fuel, clothes, toiletries, takeaways, nights out and presents. It is the hardest number to pin down and the one you can change fastest.
Go through your statements and sort each payment into a few simple groups. Most people find one or two groups are much bigger than they expected. Small, frequent spends like coffees and snacks are easy to overlook, so include cash withdrawals too.
Step 4: Measure your debt repayments
List every credit commitment with its monthly payment: credit cards, loans, car finance, catalogues, buy now pay later and overdraft charges. Add them up and divide by your net income.
Say you take home £2,000 a month and pay £300 towards debts. That means 15% of your income goes on repayments. There is no single safe figure, but the higher it climbs, the less room you have for everything else. If you are only managing minimum payments, or relying on credit to cover essentials, get free advice from StepChange or National Debtline sooner rather than later.
Step 5: Check your safety net
Your savings rate
Your savings rate is the share of your income you put aside each month. Divide what you save by your net income, so saving £100 out of £2,000 is a 5% savings rate. If yours is small or zero, do not be discouraged. At first the habit matters more than the amount. A standing order that leaves the day after payday, even for a modest sum, means you save before you have a chance to spend.
Your emergency buffer, counted in months
Now look at your savings as time rather than money. Divide your easy-access savings by your essential monthly costs, meaning your fixed costs plus basic food and travel. If essentials come to £1,500 a month and you have £750 put by, your buffer is half a month.
A common guideline is to aim for three to six months of essential costs. That can feel a long way off, so many people set a first target of one month and build from there. Even a small cushion means a broken washing machine does not have to go on a credit card.
Step 6: Put the numbers together
Take your net income and subtract fixed costs, variable spending, debt repayments and savings. What is left is your surplus or your shortfall. If it is negative, look first at variable spending, then at fixed bills you could switch. If you still cannot make it balance, MoneyHelper has a free budget planner, and Citizens Advice can help you check you are getting all the income you are entitled to. This article is general information, not financial advice.
