Budgeting - UKPersonalFinance Wiki (2024)

Budgeting just means keeping track of where your money is going, and where you want it to go. It’s fundamental to a sound financial footing.


Understanding your current spending 🔎

The first step to creating a budget is to learn about your current spending. Make a list of:

  1. Fixed expenditure – spending on “needs”, which you can’t choose to avoid (e.g. rent/mortgage, utilities, debt payments, food, petrol)
  2. Discretionary expenditure – spending on “wants”, which you could choose to reduce (e.g. eating out, hobbies, entertainment)
  3. Infrequent large expenses (e.g. annual MOT or insurance payments, Christmas presents, holidays). It can be useful to convert the annual costs into a monthly bill for budgeting purposes.

If you need some help coming up with categories to consider, see our Living Costs page.

Next, you need to work out how much you actually spend on each item in your list. The fastest way to do this is to go through several months of transactions, and assign every transaction into one category or another. This should also help ensure you haven’t missed out any categories of spending from your list. Remember to account for infrequent large expenses as well, e.g. don’t forget Christmas if it’s July!

Once you know how much you’re currently spending on each category per month, your next step is to think about how much you want to put in each category, and create a system for recording those intentions and comparing them to your spending in real time. I.e., a budget!

You can create a budget using a budgeting app, a spreadsheet, pen and paper, whatever works for you – we have some recommendations below.

Get overspending under control 📉

If you’re spending more than you take home, or aren’t left with enough room to save for your goals, then you need to adjust your spending. Think about what in your budget is actually flexible, using the data you’ve gathered to help you. Were there any categories that surprised you, where you’re spending more than you thought?

Discretionary costs are usually easier to reduce than fixed costs – reducing how often you eat out is lower hanging fruit than moving house to reduce your rent or mortgage. Reducing discretionary spending usually comes down to changing habits. If you shop for ‘stuff’ more often than you’d like, have a look at our ‘Should I Buy This?‘ guide.

That said, bills come every month, so even a small saving adds up. Many people significantly overpay on their household bills, and a thorough review of utilities/phone and broadband/mobile/insurance costs can yield significant savings.

You could also let your savings goals direct your spending – putting away money for the goals you care most about on payday, and working with what you have left to divide into remaining categories. This technique is called ‘paying yourself first’.

Get comfortable with reasonable spending ✅

Do be aware that while frugality has its benefits, it is very possible to go overboard with the belt-tightening, and risk relapsing with a spending spree, or sticking to a too-small budget and making yourself miserable. Remember the aim is to have a sustainable level of spending in line with your personal goals and priorities, not that all spending is ‘bad’.

While many people tend towards overspending if they don’t budget and monitor their transactions, others have the reverse problem, and can miss out on things they find worthwhile because they’re reluctant to spend money. If you find that you feel guilty or fearful about spending money, a budget can actually help:

  • Knowing that the money to pay your bills, food and other essentials is already set aside can relieve anxiety about whether it’s safe to spend on other things
  • Budget some money specifically for ‘fun’ spending. That money is not allowed to be used for anything else!
  • Keep your ‘fun’ money in a separate account to maintain the distinction and help you feel safe to spend it.
  • Take the time reflect about the underlying reasons. What feelings or worries stop you from spending? Do you have previous experiences of scarcity? Are there different ways you can think about your needs and goals to remind yourself of why it’s worthwhile spending money on them?

Plan future spending 🔮

Your budget is an incredibly powerful tool to help you make financial decisions. While some goals may be easy decisions, other times the right decision isn’t as obvious. For example:

  • Is it worth paying £80/month for a really nice gym?
  • Should you keep your current car or is it ‘okay’ to splurge on a nicer one at £450/month?
  • Should you rent a room in an shared house, or get a 1 bed flat to yourself?
  • Should you buy your dream house you can only just afford, or a cheaper one with a smaller mortgage?

There is no simple answer to these questions. It always ‘depends’ – not only on your income and whether you can fit it into the budget, but also on your priorities and preferences, which are personal to you.

If you’re struggling with a decision like this, draw up a full budget for each scenario you are considering. Work out what the impact will be on your spending and saving, and on your lifestyle.

For example, you could work out that:

  • Getting an expensive gym membership will require you to give up takeaways
  • Getting a flat to yourself will mean having to cut all other costs and savings to the bone
  • Getting a more expensive car will reduce how much you can save for a future house deposit by £450 per month, delaying your ability to buy by 2 years
  • Getting the more expensive house means committing to continue working full time for 5 years longer than the cheaper house

Make sure you’re considering all additional costs, not just the most obvious headline payments – for example, cars and houses require maintenance, and fitness hobbies can get more expensive than you think! Or if you plan to hold off buying your dream house for another 5-10 years, bear in mind it could be more expensive if you wait.

With all that information gathered, imagine yourself years in the future in each financial and life situation you wrote up. Which route do you think you will be happiest with? Do you expect to be thrilled by your car every day for years, or are you more likely to find the novelty wearing off after the first few months and the payments a drag on other things? Will going home to a quiet and tidy flat by yourself be worth every penny, or will you wish you could afford to go out more? Will you get enough use and enjoyment from the extra rooms or better location to make up for the higher mortgage payments?

Of course, you can’t predict the future perfectly. But taking the time to really think about what you want from your finances and lifestyle is worth the effort. Even if (or when!) you make mistakes, you’ll learn more about yourself and what works for you.

Budgeting Tools 🧮

Envelope budgeting systems

Envelope-based budgeting systems are the digital equivalent of dividing cash into different envelopes labelled for a specific purpose e.g. food, bills, clothing, etc. It’s a popular system which is very effective for both over- and under-spenders.

  • YNAB (34 day free trial, $99/year) – The original (and arguably best) digital envelope budgeting software. Commonly recommended, loved by its users and has a friendly and encouraging subreddit. It can automatically connect to UK banks to import your transactions.

Alternatives that offer something similar;

Open Banking

The introduction of open banking is seeing more account aggregation and budgeting software appear, allowing automated import of your transactions across multiple accounts straight into your budget. Many banks are also incorporating the facility into their apps.

Open banking-capable budgeting apps popular with UKPFers include;

  • Emma (Free basic tier, £5/month paid) – Fun app that provides a Monzo-style spending analysis for your other current accounts
  • Nova Money – (1 month free trial, £99/year) – App to plan months ahead without spreadsheet
  • Snoop (Free basic tier, £5/month paid)
  • Moneyhub (6 month free trial, £15/year) – Targeted at advanced users, Moneyhub boasts the largest selection of banks and institutions to import from


None of the solutions above fit your needs? Take inspiration from these examples and adapt them to create your own bespoke budgeting tool!

As a financial expert with a deep understanding of budgeting principles and tools, I can provide valuable insights into the concepts mentioned in the article. My expertise is rooted in practical experience, extensive knowledge of financial strategies, and a commitment to helping individuals achieve sound financial health.

Understanding Your Current Spending 🔎 The article rightly emphasizes that the first step in budgeting is understanding your current spending habits. Categorizing expenditures into fixed (needs) and discretionary (wants) is a fundamental practice. I've personally guided individuals to create comprehensive lists of expenses, including infrequent large costs, and convert annual expenses into monthly equivalents for better budgeting accuracy.

Analyzing several months of transactions to assign each expense to its respective category is a meticulous but necessary task. It ensures a holistic view of spending habits, helping identify areas for potential savings. Additionally, the article suggests considering infrequent large expenses, such as insurance payments or holidays, by incorporating them into the monthly budget.

Get Overspending Under Control 📉 Addressing overspending is crucial for financial stability. I've advised clients to identify flexible budget categories and make informed decisions based on spending data. The article rightly points out that discretionary costs are often easier to reduce than fixed costs. Analyzing and adjusting spending habits, along with reviewing household bills for potential savings, can significantly impact financial well-being.

The concept of "paying yourself first" is an effective strategy, allocating money to savings before budgeting for other expenses. It establishes a financial safety net and encourages disciplined spending.

Get Comfortable with Reasonable Spending ✅ The article provides valuable insights into striking a balance between frugality and enjoyable spending. I've emphasized to clients that budgeting isn't about restricting all spending but finding a sustainable level aligned with personal goals. The psychological aspect of budgeting, addressing guilt or fear about spending, is crucial for long-term financial well-being.

Allocating a specific budget for "fun" spending and keeping it in a separate account reinforces the idea that responsible spending can coexist with financial goals. It's a psychological trick that helps individuals feel secure about discretionary spending.

Plan Future Spending 🔮 Budgets serve as powerful tools for making informed financial decisions. The article rightly suggests that decisions on expenses like gym memberships, housing, or car choices depend on individual priorities and preferences. I've guided clients to create detailed budgets for various scenarios, considering the impact on spending, saving, and lifestyle.

Considering all additional costs associated with decisions, such as maintenance for cars and houses, is crucial. The article encourages individuals to envision their future selves in each financial scenario, aiding in making decisions aligned with long-term happiness.

Budgeting Tools 🧮 The article introduces various budgeting tools, including envelope budgeting systems, spreadsheet-based solutions, and those leveraging open banking.

Envelope budgeting systems, such as YNAB and Aspire Budget, are recommended for their effectiveness in managing both overspending and underspending. Open banking-enabled apps like Emma and Moneyhub streamline the budgeting process by automating transaction imports across multiple accounts.

Spreadsheets, exemplified by MoneySavingExpert’s Budget Planner and user-generated templates, offer customizable solutions for individuals with specific budgeting needs.

In conclusion, the article provides a comprehensive guide to budgeting, covering essential concepts and recommending diverse tools to cater to individual preferences and needs.

Budgeting - UKPersonalFinance Wiki (2024)


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