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How best to budget your money wisely

How best to budget your money wisely
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Learning how to budget your money can feel overwhelming, especially if you’re not used to it. Fortunately, budgeting is actually easier than you might think. Once you get past the initial set up, it can become the key to financial freedom.

Not sure how or where to get started? We have some tips to help you manage your money more easily and wisely.

1. Set financial goals

Perhaps the most important thing you can do to budget your money wisely is ask yourself why you’re doing it. It’s a lot easier to stick to a budget if you’re working towards a specific goal.

Your goal can be short term (e.g. to save x in two years for a new car) or long term (e.g. save x by the time I retire in 20 years).

Regardless of whether your goal is small or big, it needs to be specific and have a time frame attached to it. It should also be a goal that inspires you – whether that means owning a home, being debt free, or taking the trip of your dreams.

2. Track your spending patterns

Before you can start planning your budget, you need to understand where your money is going. The best way to do this is to write down everything you spend over a period of a month.

To make it easier, just write the amounts under different headings: entertainment, food, gifts, eating out, travel, etc. Make sure everything’s accounted for.

At the end of one month, add up the different categories. If your goal is to save money, look at the areas where you’re overspending.

Are there any categories in which your spend seems particularly high? Are you eating out several times per week even though you spend a lot of money on groceries? It might be time to cut down and cook more meals. Is entertainment is a major expense? It could be time to look into free ways to have fun.

3. Assign a budget to each category

Once you know how much you’re spending, it’s time to set goals.

Budget your money by assigning a set monthly amount to each category. You might decide to allocate £100 to entertainment and eating out, £250 to groceries, and £30 to personal care products. If these amounts are smaller than the amount you spent on them the month before, you’ll need to consider how to cut down to reach the planned numbers.

Any money that comes out of your bank account, including debt repayments, utilities, and transportation, should also be part of your budget.

If this is your first step into budgeting, you might need to revise your budget over a few early months until you get it right. You might discover that £250 for groceries is unrealistic and you need more. You may also find that you don’t need £30 for personal care products every month. Don’t be afraid to trim categories as you get better at managing your money.

If you need help figuring out your initial budget, The Money Advice Service has an online budget planner to help you break down your spending. 

4. Create a miscellaneous category

Things like birthday gifts, back-to-school supplies or an unexpected flat tyre can throw your budget out of line. To prevent this happening, add a category for unexpected expenses and assign some money to it every month.

This needn’t be a huge amount (£50 would cover most small expenses). If the month ends and you haven’t used it, save it for the following month or put it towards debt repayment if you have any outstanding debts. You could also save it towards bigger expenses later in the year, such as Christmas gifts.

5. Set up an emergency fund

While a ‘miscellaneous’ category should be enough to cover unexpected small expenses, life’s bigger surprises require an emergency fund. These include anything from a leaky roof, to last-minute travel to attend a funeral, to emergency surgery for your dog.

Ideally, you should have three months’ salary saved up in your emergency fund. If that seems a stretch, you could start by aiming for a more modest fund of £1000.

To save up for your emergency fund, decide on a monthly amount to send to your savings account. The more you can save every month, the sooner you’ll have your full emergency fund saved up, so make it part of your budget. 

Could you be rewarded for your everyday spending?

Rewards credit cards include schemes that reward you simply for using your credit card. When you spend money on a rewards card you could earn loyalty points, in-store vouchers airmiles, and more. The Motley Fool makes it easy for you to find a card that matches your spending habits so you can get the most value from your rewards.

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