How to budget: a simple guide to managing your money
Budgeting is a great life skill that can empower you to take control of your money. Understanding how to budget effectively can help you achieve your financial goals, prepare for unexpected expenses, and simply feel more secure day to day. The thought of budgeting might be daunting, but breaking it down into manageable steps can make the process feel easier.
Budgeting: a step-by-step guide
Calculate your income: start off by working out your total income after tax. This might include your salary, any benefits you claim, or income from other sources. Knowing exactly what you have coming in is the first important step in learning how to manage your money.
Track your outgoings: it’s time to get to know where your money goes. Try to track as much of your spending as possible. As well as your current account, don’t forget to include any other bank accounts, credit cards and loans.
Categorise your spending: once you’ve tracked all your expenses, you’ll need to group them into categories. You can be as specific as you like, but here are some common examples:
Rent/mortgage
Bills
Groceries
Transport
Eating out
Savings and investments
Debt repayment
Some banks, including Monzo, will automatically categorise your spending for you, so you don’t even have to think about it!
Set some goals: now you have a handle on where your money’s going, it’s time to decide what you want to do with it. Your goals will influence how you allocate your money in step 5. For example, do you want to save up for a specific thing, like a fancy new coffee machine? Do you want to create an emergency fund? Or are you trying to build up your savings and investments?
Build your budget: based on your income, expenses and goals, it’s time to allocate money to each spending category. The aim here is to make sure your total expenses don’t exceed your total income. You might need to make some adjustments at this stage – like reducing spending in certain areas.
Review and adjust regularly: your circumstances can change, so it’s important your budget does too! Keep an eye on it, and make tweaks whenever you need to.
Different budgeting methods
If you’re not sure how to allocate your money, there are a few different budgeting methods that can help guide you. Here are a couple of popular options:
The 50/30/20 budgeting rule: with this method, you allocate 50% of your money to needs (essential expenses like your rent and bills), 30% to wants (things you could technically live without, like that almond croissant you buy every morning), and 20% to savings, investments and debt repayment.
Piggy banking: this method involves setting up multiple piggy banks and splitting your money between each one. You use the money in each piggy bank for a different purpose, like bills, groceries and eating out at nice restaurants. These days, most people prefer to do it digitally using tools like Monzo Pots. It basically works in the same way – you create Pots for different things, and allocate money to each one.
Is it worth budgeting if my income is irregular?
If your income is unpredictable, it can be harder to budget but it’s still worth doing. Without a plan, it can be easy to overspend during better months, which can create problems during quieter periods.
To start, try to get a sense of your average monthly income by looking back at your earnings over the last few months. If you’re a Monzo customer, you can use Monzo Trends to get an overview of your past spending and income. You can use this number as a guide, and base your budget around that.
It might also be worth thinking about prioritising your emergency fund. This is a pot of money you set aside specifically for unexpected events, from a broken boiler to an emergency vet visit.
Generally, the goal is to save 3 to 6 months’ worth of living expenses in this pot, giving you breathing room to handle what life throws at you. Our Safety Net feature can also help you build and manage this crucial fund, providing peace of mind during unpredictable times.
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