Are you one of the many people in the UK who find themselves lost when it comes to managing money? You’re not alone. In fact, a third of adults have either less than £1,000 in a savings account or no savings at all. This translates to nearly 23 million people having little to no financial backup.
Getting started can feel daunting, especially if you’re short on extra cash or lacking confidence. Budgeting can help you see where your money goes and how much you can save each month. If you aren’t sure where to stay, here are eight steps to build a budget.
1. It starts with switching banks
If you’re serious about improving your budgeting and spending habits, the first step might just be to switch banks. Many people open their first bank account as teenagers and stick with it for decades. In fact, over half of Brits have never switched their current account. But why stay stuck with a bank that doesn’t meet your needs?
As technology advances, some traditional high street banks are simply falling behind. This is where smart banks like come into play. With instant notifications for every transaction, you can track your spending in real-time, allowing you to make informed decisions about where to cut back or spend more.
Starling, for example, has a Bills Manager tool to help you manage upcoming payments with autopay and centralised bill tracking, so you always know what’s leaving your account. You can also set aside money in ‘Spaces’, which are separate pots for specific expenses like holidays or groceries - and even personalise them with nicknames and images.
2. Do you know where your money is going?
Some monthly expenses are fixed, like utility bills and rent, while others, such as groceries and entertainment, can change. By categorising your spending, you can identify areas to cut back and save more. There are various apps available that can help you track your money and even automate savings based on your budget.
Apps like Emma can be used to help build your credit, save more, and spend less with an all-in-one financial membership. Utilising Open Banking, you can track all your accounts in one place, budget effectively, monitor unnecessary subscriptions, and optimise your everyday banking.
3. Clear your debt to zero
Before you can build wealth, it’s important to eliminate debt. Start by listing all your debts, excluding any mortgage balance or student loans, to see what you owe across financial providers. There are two popular methods for tackling debt: the ‘snowball method’ and the ‘avalanche method’.
The snowball method focuses on paying off your smallest debts first, which can provide quick wins and motivation as you eliminate balances. While the avalanche method prioritises debts with the highest interest rates, potentially saving you more money in interest over time.
Use tools like ClearScore to see if you’ve missed any payments, as this can impact your credit score. With a clear plan and progress tracking, you can work towards being debt-free. Knowing your credit score and report helps you understand how lenders view you and how to access the credit you deserve.
4. Create an emergency fund
An emergency fund is a savings account for unexpected costs, such as car repairs or job loss. Experts suggest saving three-to-six months’ worth of living expenses to build a strong safety net. But, the UK Savings Statistics found that two-thirds of Brits believe they wouldn’t be able to last three months without borrowing money.
It’s best to keep your emergency fund in an easily accessible account, such as a high-interest savings account, so you can access it quickly when needed. If you’re just starting out, aim to save at least £500 to £1,000 for your emergency fund and gradually increase it over time.
In the UK, savings interest may be taxed. For the 2024/25 tax year, the Personal Savings Allowance (PSA) allows you to earn interest on your savings without paying tax. The amount you can earn tax-free depends on your income tax rate:
- £1,000 for basic rate taxpayers;
- £500 for higher rate taxpayers; and
- £0 (nothing) for additional rate taxpayers.
This is where Premium Bonds could become especially advantageous. You can save up to £50,000 and the prizes you may win don’t count towards your Personal Savings Allowance. For more certain rates of return, you could use a Cash ISA which allows you to save up to £20,000 each tax year.
5. Set realistic short-term goals
Short-term savings goals are financial targets you hope to reach within one-to-five years. These might include saving for a holiday or a new gadget. It’s important to figure out how much you need to save and when you want to achieve it. For example, if you want to save £3,000 for a new car in a year, you’ll need to put aside about £250 each month.
To help grow your savings, consider using high-yield savings accounts or Cash ISAs, which usually offer better interest rates than standard accounts. Setting up automatic transfers to your savings account each month simplifies the process and keeps you on track. Regularly checking your progress can keep you motivated and allow you to make any adjustments needed to reach your goals.
6. Consider your long-term goals
Long-term goals are financial aims you want to achieve in five or more years. These might include saving for retirement, a home deposit, or just building up your personal investments. It’s important to start investing early, as this can help your money grow faster over time.
To get the best from your investments, consider making regular contributions - even if they’re small. These can grow over time thanks to compound interest. It’s also important to know how much risk you’re comfortable with, as this will help you decide on your investment approach.
Setting clear financial targets is important, whether it’s a specific amount for retirement or the price of a home you want to buy. Regularly check your investments and goals to make sure they still fit your situation. Remember, investing takes time and patience, so stay committed to your plans and be ready to adjust as needed.
7. Don’t neglect your pension
It’s essential to plan ahead for retirement by understanding your pension options and how much you will need to live comfortably. There are three main types of pensions in the UK:
- the State Pension;
- workplace pensions; and
- personal pensions.
To receive the maximum State Pension amount, you’ll need to have 35 ‘qualifying’ years based on your National Insurance (NI) contributions. You can use the gov.uk State Pension calculator to check your NI contribution record. Currently, both men and women can claim their State Pension from the age of 66 (rising to 67 in 2028).
A workplace pension is a pension that’s arranged by your employer. Contributions are taken directly from your wages and paid into your pension. Employers now have to automatically enrol most of their employees into a workplace pension scheme, and employers are also obliged to make a certain level of contributions. The minimum employee contribution is currently set at 5% of your ‘qualifying earnings’, while the minimum amount your employer has to pay is 3%.
When you pay into a personal pension, also called a private pension, your pension provider will claim tax relief on your behalf and add it to your pot. At PensionBee, we’ll add your 25% tax top up to your balance automatically. For example, if you pay £100 into your pension, you get an extra £25 as tax relief, so a total of £125 is invested in your pension. If you’re unsure how much to save, you can use our Pension Calculator to see if you’re on track for the retirement you want.
8. Review and adjust your budget regularly
Creating a budget is just the first step; maintaining and adapting it over time is what keeps you on track. Life circumstances change - whether it’s a new job, an unexpected expense, or a change in your goals - and your budget should be flexible enough to adapt.
Set aside time each month to review your financial situation. Compare your actual spending to your budget, identify areas where you may have overspent or saved more than expected, and adjust accordingly. This is also a great time to revisit your financial goals and make sure they’re still realistic and aligned with your priorities.
Consider using budgeting tools like MoneyHelper’s Budget planner or spreadsheets to track your monthly progress. By staying proactive and making adjustments as needed, you can ensure your budget works for you, no matter what changes life throws your way.
Summary
Managing your finances is a personal journey and there’s no one-size-fits-all approach. By using this checklist, you can take stock of your current situation and take actionable steps towards improving your financial health. Remember, each small step counts, and progress is what truly matters.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
