You need a budget or financial plan so you never run out of money.
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 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.
These are things you can't do without - your absolute necessities. See a few examples below:
Using the 50-30-20 budgeting rule, you should allocate 50% of your income to your needs.
These are the extra things you spend money on that make life more enjoyable. See a few examples below:
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.
This category is all about planning for the future. There are two critical future events to plan for:
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.
Below, you'll find a list of the best budgeting apps in the UK. These recommendations are based on my personal experience and third-party reviews:
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