The beginner's guide to budgeting

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A well thought-out budget is the cornerstone of good money management - but exactly how do you make one? Laura Starkey explains seven easy steps that could help you take control of your finances.

If I had a pound for every time I'd written the word 'budget' in an article, I'd probably have so much cash that I wouldn't need one of my own.

A budget is a plan that's designed to ensure the money an individual earns will cover the things they buy each month - so for the vast majority of us, having one in place is essential.

But how do you make a budget if you've never bothered before? And what do you do if, when you try, you reveal a few uncomfortable truths about your spending habits?

In this article, I'll explain seven simple steps you can take to create a budget that works for you - and reveal my tips for balancing your incomings and outgoings effectively.

Step 1: Start a spending diary
First, put a notebook in your handbag or back pocket and note down details of everything you spend for a few weeks from today.

Whether it's chewing gum, a pint of lager or a new pair of shoes you splash out on, make sure you record it.

As Victoria Bischoff discovered when she tried this a few months back, keeping a spending diary will quickly reveal where most of your hard earned money is going.

Hopefully, it will also show where you could make some easy savings.

Step 2: Open all your envelopes
This is a daunting prospect for anyone prone to stuffing unopened bills and bank statements in a drawer or piling them up like a financial tower of Pisa. However, getting on top of your paperwork is crucial if you're to have a clear picture of when, and where, you're spending your money.

So, tear open those envelopes and check your statements and bills properly.

Not only will this reveal where you're splashing the most cash - it will also help ensure you don't unwittingly fall victim to banking errors or fraud.

Step 3: Examine the big picture
By now, you should be starting to get an idea of how well you're managing your money. However, don't forget that in order to make a budget that will really work, you'll need to factor in occasional spending.

Consider setting aside a sum of money each month to cover unplanned expenses such as birthday gifts and nights out. Also, think about how much you spend annually on your summer holiday and Christmas presents.

By planning big spending like this and saving up for it in advance, you could spread the cost of those all-important celebrations over 12 months - with no need to go into debt!

Step 4: Compare what's coming in and going out
Create a list of everything you spend each month, then note down your earnings from work, investments etc. Remember to take into account the special spending (or saving) needs you identified in step three.

If you're clever with computers, making a spreadsheet could take the hard work out of calculating how much money you have coming in and going out each month.

However you do the sums, you should add up your spending and earnings so you get two separate figures. Ideally, your 'spending' figure should be lower than your total earnings.

If it is, you're bringing in more money each month than you need to spend. Well done! However, creating a tighter monthly plan for your money could still be a useful exercise; it'll ensure you keep control of your finances and could help you start saving more.

On the other hand, if you discover you are currently spending more each month than you earn, you could be heading for trouble. If you don't address this issue, you could end up caught in a dangerous debt spiral - so it's crucial that you nip this problem in the bud before it gets any bigger.

Step 5: Take control
Now it's time to create a realistic budget that will cover your monthly outgoings. If you're currently overspending, go back through your spending diary carefully to see where you could make savings.

Once you've come up with a plan, pin it up somewhere - or, if you're the technological type, store it in your mobile phone, BlackBerry or laptop.

The key now is to make sure that you stick to your new budget. As I know from experience, bending the rules just a tiny bit can mean a whole month's spending rapidly slides out of control!

Step 6: Free up extra cash
If balancing your budget is a tough task, remember there's a variety of simple ways you could free up more money.

Switching your energy provider, transferring an expensive credit card balance to a 0% card or shopping around for a better deal on broadband could save you a significant sum each month.

For more inspiration on how to save painlessly, check out Victoria Bischoff's articles How to find an extra £100 a month and 15 simple ways to save.

Step 7: Start saving
Finally, if your new budget enables you to, start saving. I think that, ideally, we should all have around three months' salary put by in case of a crisis.

Even if you can only afford to squirrel away a small sum each month, every little helps. Make sure you pick a savings account with a top rate of interest so your money is working as hard for you as possible.

However, you must also consider your individual needs and the terms and conditions of any savings account you choose. While a fixed rate bond might pay you an impressive rate of interest, for example, it's likely that locking your cash away in one would make it difficult to withdraw your money in an emergency.

Don't suffer in silence!
If drawing up a budget has made you realise you're in serious money trouble, don't despair.

National Debtline, Citizens Advice and the Consumer Credit Counselling Service all offer free, independent advice to people who are struggling to manage difficult debts.

Remember, if there's no way your incomings can match your outgoings it's important that you seek help as soon as possible. By burying your head in the sand, you could end up far deeper in debt - so be brave, and confront your situation as soon as you can.

**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**