How to budget successfully

Budgeting might seem confusing at first, but don’t let this stop you from doing it. If the word ‘budget’ feels off-putting, reframe it and call it your spending plan. 

That’s all a budget is after all – a plan for where your money goes. 

It all boils down to two things: 

1) balancing what’s coming in and going out 

2) feeling clear on where your money is going

Why should I budget?

Budgeting is actually the best habit you can get into to help you achieve your financial goals, big and small. 

This is because:

  • It helps you figure out what’s important to you
  • It forces you to map out your goals, decide where to put your money, and keep track of your progress.
  • The result of these steps is that you achieve your goals
  • It helps you make sure you’re not spending money you don’t have and getting into debt
  • It helps with feeling in control and on top of things

Things to keep in mind when budgeting

  1. Your budget is about balance

It’s about balancing money coming into your account and money going out of your account.

But it’s also about balancing ‘Present You’ and ‘Future You’. Because the money you make each month has to pay for ‘Present You’ and ‘Future You’.

There’s going to be a time in the future where you don’t earn a salary. But you’re still going to have things that you need and want. 

How do we pay for those things? We pay for them with the money we earn now. (Or else we pay for them on credit, which, in general, we want to avoid.)

So your budget is there to make sure you enjoy yourself in your present but also in your future.

  1. Your budget is what you choose to do with your money. 

So it’s your chance to choose things that make you happy. When you think about your budget or you look at your budget, remind yourself why you’ve made the choices you’ve made. Studies show that if you know and visualise what you’re saving for, it’s easier and more motivating to save. When you remember your “why,” it helps you stay on track. 

  1. Your budget isn’t a diet, it’s a spending plan.

It’s easy to get hung up on the word “budget.” It feels like a bunch of rules. It feels restrictive. It feels like there’s no way we can stick to it. 

When we fail at budgeting it’s because we restrict ourselves too much. It’s like telling ourselves we aren’t going to eat any chocolate, and feeling guilty when we eat the whole bar.

Guilt isn’t the goal of budgeting.

The real goal is to choose to spend your money on things that bring you happiness or are really valuable to you, now and in the future.

Your budget tells you what you get to spend money on.

And that’s a lot more exciting to think about than all the places you have to cut back.

Your budget doesn’t tell you where not to spend, it tells you where you can spend.

  1. Your budget should help you spend mindfully.

In a nutshell, this is just being aware of what you’re spending on and taking a moment to think before you spend.

Where we get into trouble sometimes with budgeting is not being aware of our spending. 

There’s lots of things you can use to help you spend mindfully:

  • The act of creating a budget itself will force you to think more about your money
  • Using budgeting and banking apps that let you see your spending against your budget in real time
  • Adding a notification on your phone every time a charge hits your card
  • Writing a note on your card that reminds you to think twice before spending

These four principles will change how you approach budgeting, and your mindset around it. And this will help you follow through, stick to your budget and smash your money goals.

So how do I get started?

We’ve broken budgeting down into 6 simple steps – anyone can follow these 6 steps to set up a basic budgeting system. 

  1. Track

First you’ll make a list of your fixed monthly expenses. 

This will be your rent or mortgage payments, utility bills like electricity, water, phone, and internet, and subscriptions like Netflix. Don’t forget things that you might pay less often, and work out their monthly cost. Once you have your list, you’ll easily see if there’s anything you can cut back on, especially if you don’t use it. 

After your fixed monthly expenses, it’s useful to check your variable expenses. For example groceries and dining out, clothing, entertainment, and home and car maintenance. An easy way to do this is to check your last three months of bank statements.

So in the end you’ll have the following categories:

  • Fixed expenses – these are costs that largely stay the same. Basically this category is everything that is predictable and recurring on a monthly or annual basis.
  • Variable expenses – these are costs that can vary or be unpredictable each month. It doesn’t mean they aren’t essential or necessary. It just means they can be a bit more difficult to budget for without tracking them. 

We also recommend you budget separately for Holiday expenses – this is because holiday spending is often a big portion of people’s expenses, and can be difficult to predict and plan for.

  1. Divide 

Do you have just 1 bank account? We want to encourage you to have at least 2. 

This lets you keep different buckets of money for different things. For example a bills account and an everyday spending account. You’ll have a greater awareness of your expenses. And it helps you see what money you actually have left for discretionary spending. 

Your emergency fund should be kept in a separate account. This money is usually 3 to 6 months’ worth of salary and is for urgent, unexpected expenses. So, emergencies. If you must dip into it to cover an emergency, make room in your budget to build it up again. 

When you have different accounts or different pots, you can easily see how far along you are with your saving goals, and how much money you have left to spend.

  1. Balance

This is where we prioritise and trim to start getting out of debt and then funding more of your future life.

You’ll probably want to do this the first time you set up your budget.

You may find that you’ve been spending more in some categories than you’d like.

But we also know that budgeting is something that’s ongoing. 

So this step also comes in when something happens that causes you to re-evaluate your balance. 

For example: 

  • A new goal or
  • A life milestone
  • Or, an unexpected increase in a fixed expense
  1. Automate

Automate the important stuff. Make sure all of the most important expenses, including your contributions to savings, investments and pensions, are automated. 

If you have a financial goal that’s really important to you, whether it’s paying off debt or saving for a house, prioritising it will help you achieve it. If you put money away into a separate account as soon as you get paid, you won’t be tempted to spend it. And the temptation is real. 

An easy way to do this is to set up standing orders to your different accounts or pots. 

  1. Friction

In our modern world, there’s a huge sense of immediacy. Everything is designed to be fast, easy and convenient, especially parting with your hard-earned cash. But convenience is something that you pay for – whether to have access to, like Amazon Prime, or making that impulse purchase you don’t really need. 

So it pays to add some friction to make spending money a bit harder. 

Some great tips include:

  • Deleting your payment details from online shopping sites – having to put your details in each time can be a great deterrent for impulse spending
  • Having a separate account for your day-to-day spending
  • Have a 48 hour rule – if you see something you feel compelled to buy, wait 48 hours and then see if you’re still thinking about it. This will tell you whether you really want it or if it’s just an impulse purchase. 
  1. Review

Budgeting isn’t something you do just once and never do again. 

The beauty of setting up a budget is that most of the effort happens in the beginning. From there on it’s just a question of checking in regularly to make sure you’re on track to reach your financial goals. 

If you are, then you can celebrate! And if you aren’t then you can take a look at the things you can change and make some tweaks. 

Setting aside some time once a month to look back and review your budget is what we’d suggest as a minimum to make sure you’re on track. But checking in weekly or halfway through the month is really helpful. 

Some questions you can ask yourself include:

  • Did I spend more than I earned this month?
  • Are there any expenses I can cut down or remove?
  • Have I bought anything this month that doesn’t make me happy? If so, how could I improve that for next time?

So now you have all you need to get started and budget successfully.

Octopus Money Limited is an appointed representative of Octopus Investments Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England & Wales under No. 14069098.

Octopus Money is a trading name of TW11 Wealth Management Limited. Registered in England and Wales (No. 10339119). Authorised and regulated by the Financial Conduct Authority. Our Financial Services Register number is 763630.

As with all investing, your capital is at risk. If you choose to invest with Octopus Money, the value of your investments can go down as well as up and you may get back less than you invest.