Series: Learning Finance Basics
Phase 2: Personal Finance Essentials — Part 5 of 16
Have you ever reached the end of the month and wondered, “Where did all my money go?” If you read our last post on Understanding Your Money Flow, you already know how important it is to track what comes in and what goes out. Now, let’s take the next step: building a budget that truly works for real life—even if you’ve never made one before.
What You’ll Learn
- What a budget really is (and isn’t)
- How to build a simple, realistic budget from scratch
- Two easy examples using GBP (£)
- Common budgeting mistakes to avoid
- Action steps to get started today
What Is a Budget?
A budget is simply a plan for how you’ll use your money each month. Think of it like a map for your finances: it shows you where your money should go, so you’re not left guessing. A good budget helps you cover essentials, avoid surprises, and make progress toward your goals.
How to Build a Simple Budget
Let’s break budgeting into easy steps, using everyday amounts in British pounds (GBP).
Step 1: List Your Income
Start by noting all the money you expect to receive in a typical month. This could be your salary, benefits, or any other regular income.
- Example: Emma earns £1,600 per month from her job.
- She gets no other regular income.
- Total monthly income: £1,600
Step 2: List Your Expenses
Next, write down what you spend money on—both needs and wants. Break them into categories like housing, food, transport, bills, and fun.
- Rent: £700
- Utilities (gas, electric, water): £100
- Groceries: £200
- Transport: £80
- Phone: £30
- Entertainment (streaming, eating out): £90
- Savings: £100
- Other: £50
- Total expenses: £1,350
Step 3: Compare Income and Expenses
Subtract your total expenses from your total income:
- £1,600 (income) – £1,350 (expenses) = £250 left over
This leftover amount can go toward extra savings, paying down debt, or something special.
Another Example: Tight Budget
Let’s say Alex has a lower income and higher expenses:
- Income: £1,200/month
- Expenses: £1,250/month
Alex is £50 short every month. In this case, Alex needs to look for ways to cut back on non-essential spending or find extra income sources, such as a side job or selling unused items.
“A budget is telling your money where to go instead of wondering where it went.”
John C. Maxwell
Common Mistakes
- Being too strict or unrealistic: Cutting out all fun spending can backfire. Allow some room for treats.
- Forgetting irregular expenses: Overlooking expenses like car repairs or gifts can throw off your budget. Plan for them by setting aside a small amount each month.
- Not adjusting the budget: Life changes, so review your budget monthly and tweak as needed.
- Guessing amounts: Use your bank statements to find real numbers instead of estimates.
Action Steps
- ☐ Write down all your sources of income for the month
- ☐ List your monthly expenses, using your last few bank statements
- ☐ Add up your total income and total expenses
- ☐ See if you have money left over or if you need to cut back
- ☐ Adjust your spending or savings goals if needed
- ☐ Set a reminder to review your budget every month
Recap
Budgeting doesn’t have to be complicated or restrictive. It’s simply a way to plan ahead so your money works for you—not the other way around. Start small, be honest with yourself, and adjust as you go. In our next post, we’ll look at how to set financial goals that motivate you to stick with your budget.
Disclaimer
This article is for educational purposes only and does not constitute financial advice. Everyone’s situation is different. Please consider your own circumstances or consult a financial professional if needed.
Glossary
- Income: Money you receive, such as salary or benefits.
- Expenses: Money you spend, including bills, rent, and fun.
- Budget: A plan for how you will use your money each month.
- Savings: Money put aside for future needs or emergencies.
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