Financial education: spending and budgeting

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The key to budgeting is knowing yourself really well, and being honest about what you can and can’t achieve with your money. Done right, budgeting can help you to:

  • stretch your money – no more being broke at the end of the month

  • make better decisions – you’ll know when to treat yourself and when not to

  • reach financial goals – like paying off debt or saving for a house, wedding or retirement

  • spot issues quicker – like missed payments or identity fraud

  • feel calmer – you may have to make some tough decisions at first, but budgeting can help you feel more in control

Balancing your budget

Before you start looking into which type of budget might be best for you, you'll need to work out how much you spend and balance your budget.

Balancing your budget means working out what you need to change in order to have your incoming and outgoing amounts line up.

Budget your income

You need to know how much money you have to play with each month. This is straightforward if you have a regular salary – just make sure to use the 'net pay' figure on your payslip, as this is what you take home after tax.

Other sources of income may include:

  • freelance fees

  • tips, bonuses and commission

  • government benefits, like jobseeker’s allowance

  • student loan or grant

  • interest

  • dividends (money you get for owning shares in a company)

  • capital gains (money from selling something valuable, like property)

Does the amount you earn change each month? If so, try calculating a minimum monthly income to use in your budget. Or – if you have a financial buffer – you could use an average monthly income.

Some of your income may be paid annually rather than monthly. You may want to leave this out of your monthly budget until the money’s in your account.

Budget your expenses

Next, you need to know how much money you spend each month. It’s useful to split your expenses into two categories.

  1. Fixed expenses – these are things like rent and subscriptions, where you already know what you’ll have to pay. You can get an idea of your fixed expenses by looking at standing orders, bills and Direct Debits.

  2. Variable expenses – things like food and money for going out, where the amount can change from month to month. It’s useful to record them in subcategories, like eating out, transport and holidays.

You may need to pay some expenses annually or quarterly, like car insurance or bills. You might want to work this into your monthly budget by putting aside part of the cost every month.

Compare income and expenses

Does your income cover your expenses? Simply minus your total monthly expenses from your total monthly income to find out.

If you come out with a negative number you need to spend less or earn more. This is called balancing your budget. You could reduce spending in one of the variable categories – or you might choose to cancel non-essential fixed expenses, like a Netflix subscription or gym membership.

If you’re left with a positive number, that’s a great start. You may want to adjust your spending anyway if you’re working towards financial goals like paying off debt or saving up. It’s always good to leave a little extra in the bank for unexpected expenses and emergencies. This helps make sure you don’t miss a payment or go into an unarranged overdraft.

Illustration of cash

Different types of budget

There are lots of different types of budget and finding the best one for you can seem like an impossible task. Here are a few different types and a guide to figure out the best one for you.

Zero-sum budget

A zero-sum budget is useful if you:

  • need to get your spending under control

  • want to stop wasting money

  • get surprised by changes in your monthly expenses

  • have an irregular income

How to create a zero-sum budget

Have your income ready

You should start creating your zero-sum budget on the day that you get paid. That way, you know exactly how much you have to play with.

List your expenses

Find out what costs you need to plan for. It can be useful to review your regular bills and spending habits. You should also think about any one-off expenses that are coming up, such as birthday presents or holidays.

Add up the total cost of your planned expenses. You’ll need to find ways to cut costs (or earn more) if your expenses outweigh your income. You can also move money around. For example, you might decide to spend less on luxuries and put more into savings.

Give every pound a purpose

Keep finding ways to use your money until it’s all accounted for. That can include paying off debt, putting it in savings or even treating yourself to a spa day – whatever's right for you.

Review it monthly

You’ll normally adjust your zero-sum budget every month by adding new expenses and taking away old ones. Say you budgeted £100 for Christmas presents in December. Once the festive season is over, you’ll need to find a new purpose for that amount – like January sales shopping or savings.

You may need to make bigger changes if your income is different each month, like if you’re self-employed.

How to stick to a zero-sum budget

A budget is only as good as your commitment to it! Luckily, we’ve got some solid tips to keep you on the straight and narrow.

  • Go into a lot of detail if you’re new to zero-sum budgeting – you may want to set a spending amount for every food shop, train journey and night out

  • Be realistic about what you need and how much things cost

  • Cover your essential expenses first, such as rent, bills and basic food

  • Where you can, set up Direct Debits to pay bills on payday, so you have fewer categories to think about

  • If you’ve included savings in your budget, pay yourself first by transferring the money to a savings account as soon as you’ve been paid

50/20/30 budget

A 50/20/30 budget is useful if you want to:

  • get on top of debt

  • save steadily over the long-term

  • cover essential costs more reliably

  • avoid a very detailed budget

The 50/20/30 rule was coined by Elizabeth Warren – an American senator and bankruptcy expert. The idea is to split your earning so that 50% goes on things you need, 30% on things you want, and 20% on repaying debts and saving for the future.

How to create a 50/20/30 budget

Work out your monthly income after tax

This is usually the net pay figure on your payslip. It may also include things like bonuses and tips. If you have an irregular income, consider working out a minimum, average or projected income.

Identify your ‘needs’

These are expenses you must cover to have an acceptable quality of life, like:

  • rent or mortgage payments

  • council tax

  • energy and water bills

  • travel costs for getting to work

  • basic food, clothing and personal care items (think bread, socks and soap)

  • internet and phone contract

  • minimum payments on credit accounts (you may run into financial and legal issues if you don’t pay these)

Everyone has a slightly different idea of what an acceptable quality of life is. It’s best to start with the absolute basics and go from there.

Some expenses can be hard to place because they cover a ‘need’ but are also a luxury. To use an extreme example – you need to get to work, just not in a Porsche. You could split these costs between the ‘need’ and ‘want’ categories to balance them out.

Once you know what your ‘needs’ are, make sure you don’t spend over 50% of your monthly income on them. If you’re new to 50/20/30 budgeting, you may want to estimate upcoming expenses for the month. You can do this by looking at previous bills or bank statements. If it looks like your ‘needs’ will go over 50%, think about how to reduce their cost (for example, by finding cheaper travel).

List your ‘wants’

Spending almost a third of your earnings on things you want sounds sweet. But don’t buy those expensive shoes just yet! The category is designed to cover every purchase that isn’t completely essential – and you’ll find the costs add up quickly.

Here are some common examples of ‘wants’.

  • Films, music and video games

  • Eating out and going out in general

  • Booze and fancy food

  • ‘Nice’ clothes and furniture

  • Makeup and perfumes

  • Phone and laptop upgrades

  • Holidays and weekend trips

Your ‘wants’ should take up no more than 30% of your monthly earnings. Again, it’s useful to estimate how much your ‘wants’ usually cost each month. Then you can find ways to reduce spending if necessary.

Make repayments and savings

  • You should put the remaining 20% of your monthly earning towards things like:

  • Building a rainy-day fund for emergencies

  • Saving up for a house deposit

  • Making pension contributions

  • Paying off credit cards, loans and other debt

Remember, this category only includes debt repayments over the minimum amount. For example, say you owe £1,000 on a credit card. Your agreement with the credit card provider means you have to pay at least £50 each month. But you’d prefer to pay off the debt faster, so you have to pay less in interest. You decide to pay off a total of £200 per month – £50 of this goes in the ‘needs’ category and the remaining £150 goes in the repayments/savings category.

Just make sure you won’t be stung by an early repayment fee for paying more than the minimum amount. You can check this in the terms and conditions of your credit agreement.

You can try a different percentage split

Some people prefer an 80/20 budget, which lumps their needs and wants together. This may be suitable if you’re not struggling to cover basic expenses, but want to save up or repay debt more reliably.

People may find that 50% of their income isn’t enough to cover the basics. In that case, you might want to adjust the percentages to better suit your situation and financial goals, to 60/20/20, for example.

Piggy banking

Piggy banking isn’t just for kids. It’s a budgeting technique that can help anyone control their spending.

The grown-up version involves setting up multiple piggy banks, splitting your money between each one, then using them for different purposes (like bills, food or having fun).

It makes it easier to see how much you have left for each type of spending, and helps make sure you have enough for the essentials (like paying bills or rent).

For example, you might have £200 left overall, but just £30 left in your piggy bank for shopping. The rest might be in a piggy bank for bills, so you know you shouldn’t touch it.

Follow these steps to start piggy banking:

1. Balance your budget

We covered this at the start of the article.

2. Choose your categories

Now group your spending into a few different categories. Common ones include:

  • Bills

  • Groceries

  • Eating out

  • Entertainment

  • Shopping

  • Holidays

  • Savings

  • Tax (if you’re self-employed)

There’s no rule about the number of categories you should have. Just remember that each one gets its own piggy bank.

3. Decide how much to spend on each category

Decide how to split your income between the different categories. You should already have an idea about how to do this from the first step (balancing your budget).

It’s usually a good idea to slightly overestimate the amount you’ll need for bills and other essentials. And don’t forget about big annual or one-off expenses, like Christmas presents or an MOT. You might want to update your allowances regularly to cover these. Or you could set up a separate piggy bank and put money into it every month so you’re prepared.

4. Set up and feed your piggy banks
Each category needs it own piggy bank – a place where you can pay in an allowance and keep it separate from the rest of your money. You may find it useful to automate these payments so you have one less job to do.

You can then move money from each piggy bank when you've spent from that area.

Illustration of money falling into a piggy bank

Non-monthly pay

Not everyone has a monthly paycheque and not everyone gets paid the same amount each month. This can make setting a budget and sticking to it quite difficult as you don't always know how much you're working with.

We've got some tips for helping you to stick to a budget if you're paid irregularly.

Work out the bare minimum you can live on

To start off with you'll need to know your 'baseline'. This is the bare minimum you can live off and will help you cover your basic needs.

Create a list of your essential expenses, like:

  • rent or mortgage payments

  • household bills

  • minimum payments on credit accounts

  • basic food shopping

  • travelling to work

Work out how much you spend on these in a month. You can do this by looking at your recent bills or bank statements. The cost of things like energy bills can change, so it’s best to slightly overestimate them.

Finally, add everything up. This is your baseline figure – the smallest amount you can live on each month.

Set money aside for emergencies

Next you should set up an emergency fund for essential but unexpected expenses, like your car breaking down. It’s especially important to do this if you can’t always predict when and how much you’ll get paid.

Once you’ve covered your basic needs, set aside some money every month. You could move money into another bank account or a savings account. How much you should set aside is up to you, it depends on how much you use for basic needs.

You should try to only dip into your emergency fund when you need to make one-off payments for things you can’t do without. And make sure to build the fund back up if you do!

Get a month ahead

You should aim to start each calendar month with at least your baseline amount in your account. This is true even if you’re usually paid more than once a month, because it's likely you’ll still have to pay for lots of things on a monthly basis. You need enough in the bank to make bigger payments (like rent) in one go.

Being a month ahead also gives you a buffer if your employer pays you late. And although you shouldn’t have to chase up invoices, it's good to have a little extra security if you don’t get paid when you should.

To get a month ahead, you may need to live on a bare-bones budget for a while.

If you're self-employed, another option may be to charge your client before you do work for them, rather than after. Even getting half the fee upfront can help.

Build a buffer in case work dries up

Work can dry up with little or no warning when you’re freelancing or on a zero-hours contract. But you can ride out these slumps by saving money when you’ve got extra. Try to put away at least three months’ worth of your baseline amount as a buffer.

If you’re self-employed, it’s also worth looking into income protection insurance. This can help you cover expenses if you end up not earning because you’re ill or injured.

Predict how much money you’ll have

Something called a ‘cash flow forecast’ helps you match how much you expect to earn against how much you expect to spend – including when the money should reach or leave your account.

This will help you budget over the long-term. It can also help you make sensible decisions about how and when you work. For example, you might avoid going on holiday the month after your income’s due to dip.

You can create a simple cash flow forecast using information about your previous earnings, your annual budget, market knowledge (like seasonal trends), and contracts with your clients or employer. It’s worth having a look for apps to help you do this, such as CashFlow Free.

Prepare to pay your tax bill

You have to tell HMRC about any income that hasn’t been automatically taxed – this often includes freelance fees and cash tips. You can do this by filling in a self assessment tax return. Then you must send HMRC any income tax or national insurance contributions that you owe.

There are penalties for paying your tax late, so it’s important to have enough money set aside for HMRC’s deadline (usually the end of January).

Use your cash flow forecast to estimate how much tax you’ll need to pay. Make sure to adjust this if you start earning more than you expected. It’s often worth overestimating the amount anyway.

Try to tax yourself every month and put the money aside in a savings account.

Illustration of a calendar with an alert

Managing your bills

It’s important to keep on top of your bills so you know how much money’s coming out. Plus, missing a payment can lead to fines, a lower credit score and even legal action.

Here are our top tips for staying in the black (not owing money).

  • Put payment deadlines in your calendar

  • Put money aside for bills

  • Keep an eye on your usage so you know what to expect from your next bill

  • Expect higher energy bills during the winter

  • If you can’t pay your bills, talk to your suppliers as soon as possible

  • Respond quickly to any letters, emails or other communication from your suppliers

  • Tell your supplier how to contact you if you move or go away for a long period

Saving money on your bills

Small changes to your monthly bills can really add up over time. So it’s worth finding the right deal and keeping an eye on your usage.


You can choose to get your gas and electricity from the same supplier, or two different ones.

Using the same supplier for both is sometimes called a 'dual fuel' tariff. It can be convenient because you only need to deal with one company, pay one bill, and you’ll usually get a discount.

But remember to shop around because the discount might not always be bigger than the savings you might make by using two separate suppliers.

Use a comparison website to compare energy offers side by side. Make sure you understand the features of each deal, and think carefully about how you use energy. For example, a multi-rate tariff can be perfect for night owls who use less energy during the day.

You’ll also need to choose between a fixed tariff and a variable tariff.

On a fixed tariff, the cost per unit won’t change, meaning you’re protected from energy price rises. (Remember, your bill can still vary depending on your usage.) You’ll usually be locked into a 12-month contract – you can leave early, but there’s typically a fee.

variable tariff lets you switch at any time with no charge. This gives you flexibility, but it’s often a more expensive option.

Make sure to check when your fixed tariff will end, because once it does you’ll usually be moved onto a more expensive variable one. Find out when your tariff ends by checking your bill or getting in touch with your provider.


Broadband packages often include internet, a landline line and even TV. You can choose separate suppliers for these services, but it’s normally cheaper and easier to combine them under one plan.

As with energy bills, it’s worth using a comparison site to understand your options. You can also try haggling with the provider, especially at the end of a contract.


There’s no need to shop around for the best water supplier, as each local area has only one. But you can choose between using a rate or a meter.

If you’re on a water rate, the amount you pay won’t change – no matter how much water you use. The rate depends on the size and build of your home. Typically, you’ll pay around £405 per year in England and Wales, or £363 in Scotland. In Northern Ireland, the cost of your water is covered by the domestic rates you pay.

With a water meter, you pay only for what you use. This can save you money if you’re water conscious, but could get expensive if you love a soak in the bathtub. Getting a water meter installed is free in England or Wales, but costs around £300 in Scotland.

Closing utility accounts

If you need to close a utility account you should get in touch with your provider directly. Give them at least 48-hours notice if you’re moving home. Take a final meter reading before you leave too – you don’t want to end up paying for the next tenant!

Your supplier may ask if you want to use them at your new home, but you can always haggle or shop around first.

Once you’ve paid the final bill and closed your account, you may want to cancel any Direct Debits for peace of mind.