If you’ve ever reached the end of the year only to find you’ve fallen short of your savings goals, mismanaged budgeting might be to blame.

Budgeting is a key component of your financial plan, as it helps ensure you organise your income effectively in a manner that supports you in achieving your long-term goals and savings objectives.

A well-designed budget enables you to track spending, avoid unnecessary debt, and allocate funds toward future investments or emergencies. By setting and adhering to a budget, you gain greater control over your finances, helping you build a solid foundation for your financial security.

Read on to discover six simple steps for designing and managing your budget.

1. Clarify your net income

The first step in designing your budget is to calculate and clarify your net income.

Your net income is your total take-home pay. It is your salary or earnings minus any tax deductions, pension contributions, or student loan repayments.

If you have an employer and receive a regular pay cheque, you should be able to easily find your net income on your latest payslip.

Meanwhile, if you’re self-employed or freelance, work out your average monthly income from the last year and incorporate any deductibles.

2. Assess your monthly expenses

Once you know your income, the next step is to track where it’s going.

Review your credit card or bank statements to see your monthly spending in one place. You might want to break this down by category. Or, if you have online banking or a banking app, you may be able to track and categorise your spending using the platform itself.

Begin by creating a list of your fixed expenses, which are costs that are unlikely to change much from month to month. These might include your rent or mortgage payments, utilities, and transportation costs. You could also include other expenses here that are not essential but you don’t want to change, such as subscriptions to music or video streaming platforms.

You can then deduct your fixed expenses from your net income, as they will always have to be paid.

Next, look at variable expenses, which are those that change depending on your activity and spending habits. These might include your weekly shop, eating out, and holidays.

Of course, you will always have expenses that are not entirely necessary, but understanding how much you spend is crucial. By tracking and evaluating these expenditures, you can identify areas where you might cut back, ultimately freeing up funds for your savings.

3. Set your savings goals

Once you’ve reviewed your expenses, you can set your savings goals as they relate to your long-term financial objectives. You can read more about setting financial goals in our recent article on the topic.

Consider what you want to achieve in the coming years, whether it’s building an emergency fund, saving for a home, or preparing for retirement.

This will also help you determine where you should invest your extra savings. For example, if you want to save more for your retirement, you might contribute them to your pension, or if you are saving for a property, you might want to increase your ISA savings.

Remember that cash savings can be useful for having easy access to liquid funds, but there may be other ways of investing your money with better growth opportunities.

It can be a good idea to periodically adjust your savings goals and financial objectives as your circumstances and priorities change.

4. Plan your spending, prioritise saving, and consider using a budgeting system

With your income and spending documented and your goals defined, you can now make adjustments where needed to avoid overspending and allocate funds toward your goals.

Begin by reviewing how much you’ve overspent in recent months and see what areas you could trim down.

If you’re concerned about going over your budget again in future months, consider using a budgeting system. One particularly popular system is known as the “50/30/20” budget, which suggests that you spend 50% of your income on needs, 30% on wants, and 20% on savings.

A good way to ensure you meet your saving goals is to prioritise your needs and savings when you get paid. This entails paying for your needs upfront, putting away your savings, and then planning and budgeting the remainder to make sure you can enjoy your wants.

5. Review and update your budget as needed

Once you’ve designed your budget, it’s important to regularly review it to ensure it’s realistic and that you stay on track to achieve your goals.

Few aspects of your budget are likely to be permanent. Your income could increase if you get a job promotion, your expenses could rise if you move house or have a child, or you may achieve one of your goals and want to set a new one.

Whatever the reason, it can be useful to develop a habit of regularly reviewing your budget and consistently following the same steps to ensure it remains aligned with your goals.

6. Speak to a financial planner

A financial planner can help you at every stage of your budgeting plan.

From reviewing your pay and expenses to helping you create savings targets to achieve your goals, they can help you design and implement a comprehensive budget that ensures you achieve your ambitions while also enjoying the journey toward them.

To speak to a financial planner, get in touch.

Email info@perennialwealth.co.uk or call 0117 959 6499.

Risk warnings

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Approved by Best Practice IFA Group 12/11/2024