Setting goals for your budget

What is a financial budget?

Budgeting is the act of dividing up a limited resource.

When we think about budgeting in the context of personal finances, it’s really the process of managing income and expenses to help you reach the goals you set.

A budget helps you organise the way you allocate your money so that there’s enough to cover immediate bills, and you also include provision for your future self and any children that you already have or may plan to 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.

Having a budget in place is a great way of ensuring that you don’t get into debt. Plus, by paying your bills on time you can build a healthy credit score and get access to better rates on personal loans or mortgages in the future.

Why is budgeting hard?

Budgeting can feel difficult because it’s human nature to prioritise short-term gratification over longer-term priorities. That’s a scientific fact 🤓

However, like any life skill, the trick to making budgeting feel easier is simply by gaining more practice and experience!

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 when you need it. Which also means less stress!

A budget forms part of your overall personal financial strategy to make sure you can weather financial storms and 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 set goals for your 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 earning 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) and is a great way of facing up to some tough trade-offs ⚖️

Top budgeting tip 💡

Setting goals for your saving targets can actually help you achieve them quicker. It’s important to have room in your budget for some fun money, but giving yourself a specific aim can encourage you to stay focused on saving.

Step.3 Automate

Once you’ve figured out your budget, you’ll need to apply it. Tackling your financial accounts to create a spending and savings plan is a rewarding process… but probably not something you want to repeat every month 🤓

To automate your budget, set up standing orders to separate out savings from spending money, and create Direct Debits to pay your bills on time.

Top budgeting tip 💡

Standing orders are fine for fixed payments, but not so good when it comes to accounting for varying amounts, based on your spending. You can use the free version of an app like Plum which automates additional savings too!

Tips for sticking to your budget

Setting a budget is a great 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’s 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 always finds a way to interfere!

It’s essential to save when you first get paid by immediately transferring the money out of your current account and into separate savings accounts. It’s easier to manage your finances when you can see how much you have to last until payday. And you might be less tempted to dip into your savings 😈

Tip.2: Track your spending

No matter how disciplined we are, there are always spending urges we struggle to control. Resisting impulse buys is a key part of the budgeting process, and one trick that might be able to help is the ‘30 Day Rule’.

The idea is that if you’re tempted to make an unplanned purchase, you walk away from the situation and make a note of the item, price and date. You can then revisit the decision later and avoid buying something you might regret.

Tip.3: Make your money go further!

Getting to grips with financial planning to create a budget can be laborious, but thanks to Open Banking there are financial products available which 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.

The app automatically gives you an adjusted balance, which takes into account any regular payments due before your next payday, and there’s a money dashboard you can use to track and compare your spending.

To learn more about Plum you can check out our website.

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