What is a financial budget?

Budgeting is the act of allocating a limited resource.

In the context of your personal finances, a budget can help you plan for anticipated income and expenses, ensuring you can cover regular bills, have money to live on and provide for your future self and any children you may have.

Why a budget is important

Creating and sticking to a budget is a key life skill and an essential aspect of money management that can help you achieve your financial goals.

Your budget can prevent you from falling into debt. Plus, by paying your bills on time, you can build a healthy credit score and access better rates on personal loans or mortgages in the future.

Why is budgeting hard?

Budgeting can feel difficult because human nature tends to mean we prioritise short-term gratification over longer-term priorities.

Like any life skill, the more you practice and gain experience, the more confident you'll get. A big part of budgeting to save money over time is about building the habit of regularly setting money aside.

There are also some ways you can use science to boost your budgeting willpower too. See our section on ‘tips for sticking to your budget’ below...

The benefits of budgeting

The most immediate benefit of creating a budget is that you shouldn’t run out of money at the end of the month, which removes the stress of juggling bills!

If you're struggling with debt, a well-crafted budget combined with careful use of credit, can help you gain control of interest payments and pay off what you owe once and for all.

A budget forms part of your overall personal financial strategy, helping you to weather financial storms that may come your way, and ensuring you have money saved for a rainy day.

Budgeting can also help you reach your saving goals and live the life you want to live. By tracking your spending and managing your cash flow day-by-day you can move closer to your long-term dreams.

How to plan and stick to a budget

Step.1 Record

Track your average income and the fixed expenses that you know you’ll need to cover with that monthly income. Even if you get paid weekly, it’s easiest to work out your budget over a month, as this is how most bills are paid.

In addition to monthly bills, you’ll also need to account for less regular annual expenses, like car insurance/maintenance and yearly subscriptions.

Top budgeting tip 💡

This is a great time to identify where you can make immediate savings from your regular payments. You could cancel unwanted subscriptions or compare bills and switch suppliers to reduce the cost of your household utility bills.

Step.2 Prioritise

Having built an understanding of your earnings and spending you’ll now need to allocate money for your needs, wants, and savings.

The amount you assign in each category is up to you, but a common budgeting rule-of-thumb is the ‘50/30/20 Rule’. It’s a bit like traditional envelope or jam-jar budgeting (which works by separating physical cash for outgoings).

Top budgeting tip 💡

Setting goals for your saving targets can help you achieve them more quickly. Whilst it's important to allocate some money for fun stuff, giving yourself a specific limit on the amount you can spend allows you to enjoy yourself, guilt-free, knowing you're sticking within the budget you've set.

Step.3 Automate

Once you've set your budget, the difference between success and failure will be determined by your ability to stick to it over the long term!

Tackling your financial accounts to create a spending and savings plan is a rewarding process… But it's probably not something you want to repeat every month.

You can eliminate some pain from the process by automating your budget. Standing Orders can help you manage your cash by separating your savings from spending money, and Direct Debits ensure you pay your bills on time.

Top budgeting tip 💡

Standing orders are fine for fixed payments, but that's not always the way life works, so your spending will naturally fluctuate to some degree, month-to-month. A free app like Plum can account for the flexibility in your budget, automatically calculating deposits on your behalf, to maximise savings when you have extra money available without leaving you short when you need it.

Tips for sticking to your budget

Setting a budget is a solid start if you’re serious about saving money. But good intentions only go so far when temptation comes calling.

If you need a helping hand, here are a few ideas on how to stick to your budget:

Tip.1: Pay yourself first

When it comes to saving money we all face our own particular challenges, but one thing is universal… Life has a habit of disrupting our best-laid plans.

By immediately transferring a portion of your wages out of your current account and into separate savings pockets when you're first paid, it can make it easier to see how much you have to last until the next payday. And by keeping the money in a separate account, you might be less tempted to dip into your savings.

Tip.2: Track your spending

No matter how disciplined we are, it can sometimes be a challenge to control our spending urges. But resisting impulse buys is a key part of limiting your spending, and one trick that might be able to help is the ‘30 Day Rule’.

The rule is intended to help if you feel tempted to make an unplanned purchase. By walking away from the situation and making a note of the item, price and date, you can then revisit the decision later and avoid buying something you might regret.

Tip.3: Do more with your money!

Getting to grips with financial planning to create a budget can be laborious, but thanks to Open Banking there are now financial products that use the latest technology in an app to simplify the process for you.

For example, Plum is a free budgeting app, regulated by the Financial Conduct Authority (FCA), which can help you budget by providing a real-time view of your spending across all your bank accounts and credit cards.

As well as helping you budget and set money aside, Plum can help you create an investment strategy or even plan for retirement.

Check out our website to learn more about Plum.