How to Budget Money: Creating a Budget for 2021
If your goal is to never run out of money, you need a budget.
In this article:
A budget is a financial plan that estimates how much money you will receive and spend in a particular period.
Consider the following example: suppose your monthly net income (after tax and national insurance contributions) is £2,000. You'll need to ensure that by the end of each month, you've spent less than £2,000 as spending more than you earn could lead to serious financial and mental health problems.
A budget helps you make a spending plan for that £2,000. A plan that ensures you never run out of money before your next payday. If you do it right, you might even have some money left over for long-term saving and investing.
There are many ways to create a budget. For example, if you have your own way of estimating your income and expenses, making a plan to keep your costs below your income, paying your debt when due and saving a little for the future, you already have a budget!
At Koody, we recommend using the 50-30-20 budgeting rule. It's a brilliant budgeting technique that suggests spending 50% of your income on your needs, 30% on wants and 20% on savings and extra debt.
Let's continue with the £2,000 monthly net income example we used above. Using the 50-30-20 budgeting rule, you'll allocate £1,000 to your needs, £600 to your wants and £400 to your savings and extra debt.
You may use the budget calculator below to quickly estimate how much to allocate to needs, wants and savings.
Note that this rule isn't set in stone and doesn't apply to everyone. Have a look at your current income and expenses and decide what rule works best for you. For instance, if you are considering adopting a frugal lifestyle in order to quickly pay off some debt, allocating 20% of your income to savings and debt may not be the optimal decision.
Needs (50%)
These are things you can't do without - your absolute necessities. See a few examples below:
- Groceries
- Essential clothing
- Mortgage payments
- Rent
- Car payments
- Utilities - energy, water, broadband, phone bill and TV licence
- Transportation
- Healthcare and Insurance
- Childcare
- Minimum loan payments. Anything above the minimum should go into the savings and debt category
Using the 50-30-20 budgeting rule, you should allocate 50% of your income to your needs.
Wants (30%)
These are the extra things you spend money on that make life more enjoyable. See a few examples below:
- Dinner and drinks out
- New handbag
- Organising a party
- Travel
- Gym membership
- Tickets to sporting events
- Latest gadget
- Shopping
Using the 50-30-20 budgeting rule, you should allocate 30% of your income to your wants.
Since our wants make life more enjoyable, it's important to spend money on them. But be careful not to spend too much. Allocating 30% of your net income to your wants is just about reasonable. Depending on your personal circumstance, 30% might even be too much.
Savings and Debt (20%)
This category is all about planning for the future. There are two critical future events to plan for:
- Emergencies
- Long-term goals, e.g., retirement, wedding or house deposit
If there's anything we've learnt from the Coronavirus pandemic, it's that emergencies happen, and it pays to be prepared. At Koody, we strongly recommend building an emergency fund to cater to unforeseen financial shocks like a job loss, major health issue or massive car repair.
Your emergency fund should be equal to at least three month's living expenses. This would serve as a buffer preventing you from making poor financial decisions in a time of crisis. You can start by allocating 10% of your net income to your emergency fund. Read more about building an emergency fund here.
The second category under Savings and Debt is long-term goals. We all have long-term goals. For some, it may be living comfortably in retirement. For others, it may be buying a home or getting married. Whatever your goals, without adequate planning, you might struggle to achieve them.
Allocate the remaining 10% of your net income to saving towards your long-term goals and overpaying your debts (if you think it's necessary to do so). Read our Investing for Beginners guide to learn more about financial planning for your future.
- Set realistic goals
Setting goals in budgeting can take several forms. One goal could be to save for a house deposit. Another could be to ensure that you spend only 30% of your income on your wants. Setting clear and realistic goals makes it easier to stick to your budget.
- Automate everything
If it can be automated, automate it. Spreadsheets are lovely and might provide you some value. Still, many people fail to stick to their budgets because they can be time-consuming and strenuous to create and manage. If spreadsheets work for you, that's fine. If they don't, use budgeting apps that connect to your bank account, so you never have to worry about manually inputting your transactions. Before you connect anything to your bank account, double-check that the FCA regulates the app or service.
- Keep track of your progress
If you use an automated service, it'll be easy to see if you are meeting your targets for spending on needs, wants and savings. You should be able to see that on a spreadsheet if it is properly designed.
- Use affirmations
Affirmations can be quite powerful. Decide that you want to stick to your budget, write down your affirmations and place them where you'll see them often. An example of an affirmation could be: "this December, I won't spend more than 30% of my monthly income on my wants."
There isn't one foolproof, absolutely amazing budgeting app in the UK, but there are a few good ones that get the job done. Below, you'll find the best ones in the industry:
- Money Dashboard
Arguably, Money Dashboard is the best budgeting app in the UK. You need to connect all your bank accounts to get an accurate picture of what comes in and goes out. You can categorise spending and view your habits over six months. It has lots of beautiful charts, provides excellent insights, and is completely free. If you are comfortable connecting your bank accounts, this is the budgeting app to go with.
- Monzo
Monzo bank is not a budgeting app per se, but it has put a lot of work into building a great budgeting offering. It allows you to categorise your spending, view detailed spending reports, move money around (it's a bank) and open separate savings pots (great if you are budgeting for many things, e.g., a new phone, school fees, house, etc.). You can also connect your other bank accounts to Monzo, which is just brilliant!
- YNAB
You Need A Budget or YNAB isn't UK-specific, but if it were, it would be the best budgeting app in the UK. YNAB gives you all the standard features you'd expect from a great budgeting app with the bonus of actually helping you improve your money habits. Some Koody Community members talked a bit about YNAB and how to connect your UK bank accounts to it. You can read more here.
And that's a wrap! If you enjoyed reading this post, please let me know by leaving a comment below! Also, you can be a part of a much bigger conversation here - join our community!
