Add up what actually comes in, list what actually goes out using real statements, divide once-a-year costs by twelve and treat them as monthly bills. Whatever is left is your spending money. Divide it by weeks, because a week is short enough to notice when you have overspent.
Most budgets fail for a dull reason: they cover the regular month and leave out the car insurance renewal. The method below is built around fixing that. The household in the example is invented, and every figure in it is there to show the shape of the sum, not to suggest what you should spend.
The five steps
Gather the paperwork first
Citizens Advice suggests starting with bank statements, payslips, card statements or bills, and receipts for things you usually pay for in cash. Rough figures will give you a general picture, but accurate ones are far more useful. Include what you spend on a partner or family as well as yourself. Citizens Advice also points people to the free budget planner on the MoneyHelper website if you prefer a form to a blank page.
Write down money coming in, after deductions
Use the figure that lands in your account, not your salary. If you are unsure how the deductions work, our income tax guide walks through a payslip. If your pay moves around, use a cautious month and not an average.
List every fixed bill
Housing, council tax, energy, water, phones, insurance, minimum debt payments. Go through three months of statements line by line. This is where forgotten subscriptions tend to turn up.
Spread the yearly bills
Anything that arrives once or twice a year goes on a separate list. Add it up, divide by twelve, and move that amount into a separate pot each payday. The bill then stops being an emergency.
Split what is left into weeks
A monthly figure feels generous on the 1st and vanishes by the 20th. A weekly one gives you a quick check on your way round the shop.
A worked month
Here is an invented household with £2,800 a month coming in after deductions.
| Line | Per month |
|---|---|
| Rent | £950 |
| Council tax | £155 |
| Gas and electricity | £140 |
| Water | £40 |
| Phones and broadband | £55 |
| Contents and other insurance | £30 |
| Food and household shop | £380 |
| Transport | £210 |
| Credit card minimum payment | £60 |
| Yearly bills pot | £95 |
| Emergency savings | £150 |
| Left for everything else | £535 |
All the lines add up to £2,800 with the £535 included. Invented figures, for illustration only.
That £535 works out at about £123 a week (£535 × 12 ÷ 52). It has to cover clothes, going out, haircuts, presents outside the yearly pot and anything else not listed. If that looks too thin, it is better to learn so now than in the third week of the month.
The pot that does the real work
The £95 comes from a short list of costs that are easy to forget, because they don't appear on any given month's statement:
| Cost | Per year |
|---|---|
| Car insurance renewal | £420 |
| Car service and MOT | £260 |
| Christmas and birthdays | £360 |
| School trips and uniform | £100 |
| Total, then ÷ 12 | £1,140 → £95 |
Keep this money apart from your current account if you can. If it sits in the same place as your spending money, it tends to get spent. Keep it apart from your emergency fund as well: the MOT is a known bill and not an emergency, and an emergency fund has a different job.
Which bills come first when it doesn't add up
Sometimes the sum comes out negative. In that case, order matters. Citizens Advice calls some debts priority debts, because the consequences of not paying are serious. Its list includes:
- rent arrears and mortgage arrears, because you could lose your home
- council tax arrears, because the council can take you to the magistrates' court
- gas and electricity arrears with your current supplier, because supply could be cut off
- TV licence and court fines, because of the legal consequences
- unpaid income tax, National Insurance or VAT, because HMRC can take money from wages and use bailiffs
- unpaid child maintenance
Credit cards and most unsecured loans sit lower down, which feels backwards when those are the lenders sending the most letters. If you are in that position, speak to a free debt adviser before you make any more payments on non-priority debts. Citizens Advice says to talk to an adviser straight away if you have court papers, face eviction or expect bailiffs.
A word on rules of thumb
You will often see the 50/30/20 rule: half on needs, 30% on wants, 20% on saving. It is a rule of thumb from personal finance books, not official guidance, and a household with high rent will fail it however careful they are. Our invented family spends about 70% on needs before any saving, and there is nothing irresponsible about that. Use your own sum.
Keeping it alive
A budget tends to die after about a month of being ignored, so make it small. Ten minutes each payday, comparing the plan with last month's statement, will do. Change the numbers when your life changes. Energy prices move every three months, for instance, so that line will not stay still.
This is general information. For help with debt or if the numbers don't work at all, a free debt adviser can look at your own situation.