How to make a reliable budget that helps you achieve your financial goals

When it comes to financial planning and managing money, everyone often talks about how important it is to have a budget.

Provided that you include all the relevant information, a budget can be a useful and adaptable tool that can drive you towards your goals.

So, do you know why a budget is so important? And even more crucially, do you know what your budget needs to include?

Here’s how to make a reliable budget that’s fit for purpose, and why it matters.

A budget can help you towards your goals

Your budget’s primary purpose is to help you on your way to reaching your financial goals. Having a comprehensive budget gives you a mathematical, visual way to take a holistic look at your finances.

According to Christine Benz, director of personal finance at Morningstar, a budget “helps ensure that your spending syncs up with your priorities.”

In essence, what Benz means is that your budget allows you to clearly see where your money goes each month, and how far that spending goes in achieving your financial goals.

This is also the first place where you can start to make changes that ensure you’re on track to hit your targets.

Create a list of all your income

So, what actually needs to be in your budget?

The first step is to total up all your income. Add together your monthly salary – including an average of any bonuses – alongside any interest you receive on your savings, and any income provided by investments or property you hold.

This figure should tell you exactly how much money you have coming in each month.

Subtract all of your expenses

Next, you need to calculate the total of all your expenses, and then subtract them from your total income.

First, take all your long-term expenditures, including your mortgage or rent payments, any other loans you have, your food and utility bills, childcare costs, and your average credit card bills.

Then, include your regular short-term expenditures, such as haircuts, gym membership, and other personal care. Also add any entertainment costs, such as any TV packages you have and streaming services you pay for.

Finally, create an average of other small, one-off expenditures, such as for dining out, going to the pub, or cinema or theatre tickets.

Add these costs together and then subtract them from your total income. This should give you a figure for how much you have at the end of each month.

Divide your expenses into needs and wants

One extra step you could consider is to divide your expenses into “needs” and “wants”.

For example, nearly all your long-term expenditures fall into your “needs” bucket, as you can’t live without a home, food, or power.

But much of your short-term spending may be surplus to requirements. You may have a gym membership that you don’t use as often as you thought you might. Or you may have more streaming subscriptions than you have time to watch.

Creating these extra categories can give you a clearer picture of where you’re spending unnecessarily, or potentially even overspending. This can help you trim the fat off your budget, giving you more money to save, or perhaps even to spend on the things that you really want.

Reaching your targets

Once you’ve got a clear figure for your monthly spending, you can see whether your current plan keeps you on track to reach your goals.

If you’re concerned that your current budget won’t get you to where you want to be, there are a couple of strategies you could consider to refine it.

Pay yourself first

One method for helping you to save even more is to “pay” yourself first.

Rather than receiving income, spending, and then saving what’s left, consider prioritising your saving goals first. This strategy ensures you always save a healthy amount, putting a limit on your spending in the process.

Make sure you leave yourself with a small amount for things you enjoy, as otherwise you may end up resenting your savings plan.

The 50/30/20 strategy

Another method you could use is the 50/30/20 budget from All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren.

In this budget, Warren suggests spending 50% of your income on your “needs”, 30% on your “wants”, and saving the remaining 20%.

Having this hard figure prevents you from overspending, while also giving you a good target for your savings.

You could adjust this strategy so that it suits you even further, perhaps saving 30% and only spending 20% on your wants.

Update your budget

An important thing to remember is that your budget is a variable document that will change over time.

In fact, your budget should change with you as your life and spending priorities change. Your financial goals might change too as you get older.

Don’t forget to consistently update your budget so that it always reflects your current lifestyle.

Work with a financial planner

Creating a budget is a great start on the road to financial freedom, but there’s no real substitute for working with an experienced financial planner.

At Britannic Place, we can help you define your financial goals and create a strategy that helps you reach them.

Email or call 01905 419890 to find out more about how we could help you.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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