How to Make a Budget – Step By Step

One of the things I constantly find myself writing on this site is the huge financial benefits that can be obtained from writing a budget. While many people know how to to this already I thought it would be good to create a breakdown of how I go about the budgeting process for my own finances.
Below I have set out how I put together the budgets for my personal finances. While the below has worked extremely well for me it is worth remembering that different things work for different people so what works for me may not be right for you. Despite this I firmly believe that the most people could benefit greatly and save themselves a lot of money by following my approach outlined below.

1. Log all of your expenditure

OK so before you begin setting your budget you first of all need to understand where all of your money is going at the minute. By understanding in detail what you currently spend your money on you’ll be in a good position to make changes that will enable you to better achieve your financial goals.
There is an unlimited number of ways you could log your expenditure. Personally I make a note of every penny i spend throughout the day using my iPhone and a handy application called iExpensit however making a quick note in a small notebook would work equally well. At the end of every day I transfer all of the expenditure details into a Microsoft Excel spreadsheet. Every time i spend any money (even if only a pence on a chocolate bar) i log the following four pieces of information:

• Date
• Cost
• Description
• Payment Method

In addition I have a number of standing orders and direct debits that take money from my bank account to pay for items such as utility bills, car insurance etc. Every few days I check my bank statement online and add any expenditure to my log.
At the end of the month I have a complete list of each and every penny i have spent, how i spent it and what on. At the end of the month I move on to the next stage in my budgeting process: categorizing my expenses.

2. Categorize All Your Expenses

Staring at a great long list of expenses can be quite a daunting task. Doing so it can be very hard to quickly identify areas where you may be spending too much or can save money.
In order to make my expenditure list a bit more usable I categorize each piece of expenditure into the following categories:

• Rent/Mortgage
• Utility/Household Bills
• Groceries
• Eating Out
• Socializing
• Clothes Shopping
• Other Shopping
• Savings & Investments
• Travel/Transport

3. Analyze It

Now i have everything nicely categorized I do a quick bit of analysis. First up i create chart in Excel showing the amount of expenditure in each category over the month. At this point i have a direct visualization of my expenditure. Being able to ‘see’ where I spend my money allows me to immediately compare the proportions and types of spending I do.

Monthly Expenditure Chart

4. Identify Areas for Savings

Once you have created your spending graph outlined above you may well have identified a couple of categories of expenditure where you know you are spending to much. Even if you have you should analyse all of the categories to if there are any easy savings to  be made.

A useful method I have devised is to look at the individual items of expenditure in each category (the Excel filter feature is great for this) closely. I then force myself to write down two ways in which I could reduce my net expenditure in that category.

For some categories identify potential ways to save money is easier than for others. Below I have included an example from a budget I set myself a couple of years ago.

Categories & Potential Savings

Rent/Mortgage

1. Move to a smaller/cheaper apartment
2. Rent the spare room to a lodger

Utility/Household Bills

1. Cancel my satellite TV subscription
2. Move to a cheaper mobile phone tariff

Groceries

1. Buy less ready made meals and cook more meals myself
2. Buy more cheaper ‘own brand’ products

Eating Out

1. Only eat out in the evening once a month
2. Take a packed lunch to work instead of buying lunch out

When generating these ideas do not worry if some of them are seemingly impossible to implement (for example maybe you need your car to get to work so you can’t sell it). The idea is to simply brainstorm and get down at least two ideas to save money in each category.

5. Set Yourself Targets

As is the case with diets shock therapy may seem like the quickest approach but it rarely works. If you immediately try to stop all non necessary expenditure you’ll almost certainly become disillusioned and unsuccessful in your attempts to save money very quickly. As is the case with dieting you stand a much higher probability of succeeding if you make small consistent and incremental changes to your spending habits.

Out of the list you generated above select a minimum of five items to implement throughout the next month. The best way is to write them down in your Excel sheet. You now have a set of direct actions to do next month that will save you money. Be sure to refer back to this list every couple of days so you do not lose sight of your goals.

When setting your budgetary goals it is important to be realistic. If you set yourself targets that are too hard you’ll fail to reach them and will most likely become disillusioned

A good example of setting achievable/realistic goals came when I did my first budget. Rather than stating I would make a packed lunch to take to work every day I knew that because of the hectic nature of my lifestyle, and very long work hours this would not always be possible. Instead I pledged to take a packed lunch in at least twice a week. While the potential saving I made was less, i knew I was much more likely to achieve this and make the change a permanent feature of my weekly routine.

6. Allow yourself small rewards

While the aim of setting yourself a monthly budget is to save you money, you probably don’t want to do so by not going out, buying nothing and eating food you don’t like. The aim here is to save you money, not make your life miserable!

A good way to keep your motivation up is to allow yourself small rewards out of the savings if you are successful. For example why not treat you and the family to a meal out at the end of the month with some of the savings you make?

Budgeting Conclusion

Once you have worked through the above process and implemented a few of your savings approaches you’ll be amazed at how easy it all was. In fact very early on in the process you will most likely start questioning the money you spend on a daily process much more than you did in the past.

Do you have any useful money saving tips that have helped you reduce your monthly expenditure? If so we’d love to hear them or hear about your budgetary successes. Just leave us a comment below to share them with us.