How to budget in five simple steps

Know you need to budget, but having trouble getting started? Just follow these easy steps...

Here at lovemoney.com HQ, we're pretty big on budgeting. Knowing how to budget is a fabulous way of helping to keep your finances in order. But getting started can be tricky. After all, getting the lowdown on how much you spend compared to how much you earn can be a pretty scary prospect, and many of us would probably prefer not to know!

Even if you do manage to motivate yourself to get started, it's all too easy to be thrown off balance again - especially when you suddenly remember it's your dad's birthday tomorrow, or you get invited to yet another wedding.

But budgeting really is important if you want to regain control of your finances. So I've come up with a step-by-step way to help get you started with your budgeting plan - and stick to it!

1) Gather together all your paperwork

If you've been sensible, all of your paperwork will be neatly filed away in alphabetical/chronological order. If, on the other hand, you're like me, your paperwork is likely to be lying in a disorganised pile somewhere.

Unfortunately, the first step of budgeting is to get all of this together - that includes all of your bank statements, credit card statements, pay cheques, utility bills etc. It's hardly the most exciting of tasks, but you'll feel a great sense of relief once it's done!

2) Get to grips with your spending habits

Nowadays it can be very easy to lose track of what we're spending where. So to help you understand your spending habits, a good first step is to set up a spending diary – in other words, a list of what you spend where. You can do this using the free spending Tracker tool at lovemoney.com. If you register your accounts, every time you make a purchase – no matter which bank account or credit card you use – the tool will record it for you, and then allow you to categorise all your transactions so you know exactly what you're spending your money on every month. Alternatively, just make a note of everything you spend on paper.

Every time you take out your wallet to make a purchase, make a record of it. Don't leave anything out, no matter how small - you'll be surprised how the little things add up! It's worth doing this for about a month to help you get a detailed picture.

3) Make a list of your earnings and outgoings

Once you've got to grips with your spending habits, the next step is to make a list of all your outgoings and earnings. This is where all those documents come in handy!

It's a good idea to calculate this as an annual figure rather than monthly, because monthly figures can vary considerably - for example, you might be paying out for a holiday one month, or Christmas presents the next. Once you've worked this out, you can divide the result by 12 or 52 to figure out your weekly or monthly expenditure.

You can then use this information to set yourself a budget. Thanks to our new budgeting tab, you can now set a monthly budget for any specific category (such as petrol and fuel). This will allow you to track your progress through the month against the budget you set.

Alternatively, you could use a nifty tool such as the statement of affairs calculator or this budgeting calculator from the FSA. All you need to do is enter your figures in the boxes provided to view an instant snapshot of your household budget and personal balance sheet.

Just remember that it's really important to be honest when you're doing this - don't leave anything out. Don't forget to include items such as birthday cards, presents, holidays, and your everyday coffee - your spending diary should help you with this. It's also worth adding in an estimated cost for emergency repairs such as possibly to your car or boiler. It's always better to overestimate than underestimate, so be generous. And don't forget about any annual insurance policies, such as home insurance.

Similarly, make sure you don't forget anything when you're calculating your earnings too - this can include interest on your savings, benefits, and so on.

4) Cut down!

Once you've done all this, it's time to ask yourself the big question. Are you spending more than you earn?

If, much to your horror and disbelief, the answer is yes, you'll need to tackle this head on.

To do this, it's worth examining your outgoings to see whether you can make any cutbacks. Perhaps you could reduce your socialising, food bills, or clothes shopping. Maybe you could start bringing your lunch to work, or give up that cappuccino from Starbucks every morning.

It's important to be realistic when you're doing this - don't set yourself an impossible task that you know you'll never stick to.

Obviously, items such as your utility bills will still need to be paid. But that doesn't mean you can't save money. Taking the time to shop around and find a cheaper gas and electricity tariff can really pay off and you could find yourself saving hundreds. Simply use our comparison tool to see whether there's a better deal out there for you. Similarly, see if you can get a better broadband/mobile phone/insurance deal.

Related how-to guide

Set a budget and stick to it

Learn how to successfully squeeze your budget.

See the guide

5) Save!

If you're lucky enough to have some spare cash at the end of each month, don't leave it sitting in your current account, tempting you to spend it. Instead, move it into a savings account. It's worth setting up a standing order for this so that the money moves out of your current account and into your savings account before temptation strikes.

A final note

If you're really struggling with your finances and know you're slipping further into debt, there are people who can help you, so don't think you're on your own. It's always worth consulting a debt charity such as The Consumer Credit Counselling Service, National Debtline or Citizens Advice Bureau (but beware there is a long waiting list).

Finally, don't forget you should review your budget on a regular basis to make room for any changes in your outgoings/earnings - for example, if you receive a pay rise, or your landlord increases your rent. Reviewing your budget will also help you to assess whether you're on track with your finances.

Happy budgeting!

This is a classic article which has since been updated.

More: Six money must-haves for summer | Your four step financial health check