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6 step guide:
How to create a budget

A step-by-step guide to creating and using a budget

In a post-covid world where we find ourselves in an energy crisis, a monthly budget is crucial to helping you manage your money effectively.

If you need help controlling your spending, help getting out of debt, or want to understand how you can save to cover the rising cost of bills, you need a monthly budget.

What is a budget?

A budget will show you how much money you expect to bring in, then compare that to your required expenses, such as rent and council tax, and your discretionary spending, such as entertainment or eating out.


A budget is a fantastic tool for achieving your financial goals.

Important: a budget requires you to be honest about your income and expenses. To create a realistic budget, you must be willing to work with detailed and accurate information about your earning and spending habits.

What does a budget do?

A monthly budget is a financial planning tool that allows you to work out how much you will spend or save each month. It also allows you to realize your spending habits.

An effective budget relies on balance. If you spend less in one area, then you can spend more in another. Once you’ve listed your income and expenses, if you find you’re in a negative (minus), you must ensure your required expenses, such as rent and council tax, are being covered by reducing monies allocated for discretionary spending.

The result of your budget will show you where your money is coming from, how much is there, and what you spend it on each month.

Important! If you find your income isn’t covering the basic cost of living, we advise you seek free support from StepChange Debt Charity.

How to make a budget in 6 steps:

To create a budget that will be effective you need to understand what you’re currently spending, what you can afford to spend, and what your priorities are.

Step 1

Have all financial paperwork at hand

To enable you to get an accurate idea of your outgoings, it is advantageous to have all your financial statements to hand. This can include the following:

  • utility bills

  • rent/mortgage bills

  • credit card bills

  • receipts from previous months

Step 2 

Calculate your income

How much income can you expect each month? If your income is in the form of a regular pay-slip where taxes are automatically deducted, then use your net income (or take-home pay amount is fine). If you have additional sources of income, such as child support, be sure to include these as well.

The total income is your monthly amount 'available' to spend.

Step 3

Create a list of monthly outgoings

You need to create a list of all of your monthly expenses including mandatory costs and discretionary spending. This includes items such as:

  • utility bills

  • insurance

  • groceries

  • car payments

  • child care

  • transport cost

  • personal care 

Use receipts and statements from previous months to make this accurate and easy to include. 

Step 4

Determine fixed and variable expenses

It is simple to work out what is a fixed expense and what is a variable expense. A fixed expense is any cost that is recurring, and the same every month, such as:​

  • Mortgage/rent payments

  • Council tax

  • Utility bills

  • Insurance

  • Credit card repayments if you have a standard bill each month

Variable expenses would include anything that can change month to month, such as:

  • Travel expenses

  • Eating out

  • Groceries

  • Days out/Entertainment

  • Gifts

Begin assigning a value to each category, beginning with your fixed expenses and then do the same for variable expenses.

Step 5

Total your monthly income and your expenses​

Ideally you want to be in a position where your income is greater than your expenses. This will help with things like saving money for a big purchase etc.  If your income isn't greater than your spending  you must now assess whether it is because your spending more discretionary income than you can afford, or whether your income simply doesn't cover the mandatory costs that you must pay to live.  

The former situation is easier to fix with adjustments, however the latter will require additional support. 

For free independent advice on how to increase your income or decrease your mandatory expenses, please visit StepChange debt charity.

Step 6

Make adjustments

If your expenses were higher than your income, have a look at your variable expenses and see where you can make cuts. It might help to prioritise you variable expenses, maybe you don't need to eat out so much, or your Netflix subscription could be suspended for a couple of months?

Ultimately, you should aim to have your expenses less than your income. This way you you have a buffer for any unexpected expenses meaning less financial stress in the long term. 

How to use a budget

Once you've made the budget, the hard work really starts. It is important to keep a close eye on your budget and track the spending for each category (listed above). 


Without tracking your spending, it will be harder to keep a handle on how well you are sticking to your budget making it easier to accidentally over spend. Over spending can lead to borrowing money from creditors or having to cut back entirely on essentials for the month. This is not an effective long term financial solution.

As a rule of thumb, your budget should aim to be spending 75% of your income and 15% should be put aside for savings or discretionary expenses.

Regularly review and update your budget

Remember, circumstances change. To manage your money effectively we recommend you review and update your budget  every 3-4 months. Sit down with your budget to make sure it's updated with your current goals, income and expenditure. 

Read our money saving tips:

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