A budget is simply a plan for keeping your spending below the level of your income. If you stick to it, you’ll be better off.

1. Get prepared

To build your budget you’ll need detailed knowledge of your spending and income. Thankfully, these can all be found in one place: your bank statements, available on request from your bank or via online banking. About three months of statements should give you the information you need.

2. List your income and outgoings

The income part is easy – total up all income from your job, benefits, interest from savings, income from investments or a property you let, or pensions if you are drawing them.

The outgoings take a bit more concentration. Much of it will be obvious – rent or mortgage, utility bills, travel to and from work, mobile phone bills etc. Then there is the everyday spending we often don’t think about – take-away coffees, chocolate bars when you buy petrol, the magazines you buy when your train is delayed.

Don’t forget to include the great chunk of money that goes on the one-offs – dinner with friends, holidays, unexpected maintenance bills or anything else. These costs do not land every month, but if you divide their cost down you’ll get a figure that you can include in your budget. For example, you may spend £1,000 once a year on a holiday. Just divide this by 12 to get your monthly figure – in this case £84 –and put this down in your budget as your monthly spend on holidays.

3. Use tools to help

It will help to be as detailed as you can when you draw up your budget, but there will always be things you forget about.  Knowing exactly what you're spending each month is the first step to making sure your money is working for you. See how you're doing by filling out your average monthly expenses and income in our interactive activity sheet. You can also find tools online to help, and the best ones will prompt you to include things you may otherwise forget.

4. See where you stand

Your budget should tell you whether you are spending more, or less, than your income each month.

Spend less than you earn - that’s you, well done! Now you can focus on saving even more and putting that money to good use.

Spending more than you earn - this is a sign that you need to make changes right away. You may be managing month-to-month by dipping into savings or using an overdraft or credit card that mean extra interest costs in the future. Now is the time to identify where you can make some cuts.

5. Find savings

Examine your spending and make a list of your essential expenses like food, housing costs, regular bills. Then review your discretionary purchases such as takeaway meals, subscription services, clothing and any ad hoc expenses to see if you can make savings. Some ideas to make savings include:

Groceries - put together a meal plan and shopping list and only buy what you need and, if you have a choice of items, price compare and check the cost of name brand items versus supermarket own brands. You could also consider buying heavily used items in larger quantities and buy non-perishable items such as tinned or frozen items.

Transportation - if you haven't already, apply for a refund for cancelled rail journeys and, if you drive and are travelling regularly, price compare on fuel costs to make sure you are getting the best deal.

Entertainment - check your subscription TV package and consider reducing your service or looking at alternatives. It’s worth looking at the cost vs usage of your subscriptions for TV streaming, music, audiobooks etc. You could also consider using free online workouts instead of an expensive gym membership.

Utilities - price compare and check your providers against competitors. Be efficient by using energy saving lightbulbs, turning off lights and unplugging electronics when not in use and consider installing a programmable thermostat to save energy and costs.

Mobile/Telephone - check your mobile airtime and data packages for you and your family and if you have an independent landline assess the need to keep a separate service.

Next steps

Get started with our Interactive Spending Activity Sheet.