Budgeting - Taking Control of Your Money
A budget is a plan that matches your spending to your income. It tells you exactly where your money goes each month so you can make deliberate choices rather than wondering where it all disappeared. Budgeting is not about restricting yourself – it is about making sure your money works for you.
Written personal-finance advice is centuries old – Benjamin Franklin's 1732 pamphlet Poor Richard's Almanack was full of budgeting maxims like “a penny saved is a penny earned”, urging colonial readers to track spending and live within their means. The specific 50/30/20 rule taught on this page is much more recent: it was popularised by the American senator and bankruptcy law professor Elizabeth Warren in her 2005 book All Your Worth: The Ultimate Lifetime Money Plan, co-written with her daughter Amelia Warren Tyagi, as a simple framework ordinary households could follow without needing a detailed spreadsheet for every expense.
Income vs Expenditure
Income – all money coming in: wages, benefits, freelance earnings, rental income.
Expenditure – all money going out: fixed costs (rent, loan repayments) and variable costs (food, entertainment).
Surplus = Income − Expenditure > 0 (you have money left over).
Deficit = Income − Expenditure < 0 (you are spending more than you earn).
Fixed vs Variable Costs
| Fixed Costs | Variable Costs |
|---|---|
| Rent or mortgage | Groceries |
| Loan repayments | Clothing |
| Insurance premiums | Entertainment and eating out |
| Subscriptions | Fuel and travel |
| Council tax | Gifts and holidays |
Creating a Budget
Step 1: List all sources of income and total them.
Step 2: List every expense – both fixed and variable – and total them.
Step 3: Subtract total expenses from total income.
Step 4: If surplus, decide how to save or invest it. If deficit, identify which expenses to reduce.
The 50 / 30 / 20 Rule
A popular and simple budgeting framework splits your take-home income into three categories:
50% – Needs: rent, food, bills, transport.
30% – Wants: restaurants, hobbies, entertainment.
20% – Savings and debt repayment.
Worked Examples
Total expenditure = £750 + £420 = £1 170.
Surplus = £1 800 − £1 170 = £630.
Savings % = (630 / 1 800) × 100 = 35%.
Needs (50%) = £1 200. Wants (30%) = £720. Savings (20%) = £480.
Total expenses = 900 + 400 + 200 + 150 + 100 + 250 = £2 000.
Surplus = £3 200 − £2 000 = £1 200 surplus.
Percentage of Income Spent on Each Category
To find the percentage of income spent on any category:
Percentage = (Amount spent on category ÷ Total income) × 100
This helps you identify categories where you are overspending relative to your income.
Annual Budget
Some expenses are paid annually rather than monthly (e.g. car insurance, holiday).
To include them in a monthly budget: divide the annual cost by 12 and treat it as a monthly expense.
Example: £600 annual car insurance = £50 per month set aside.
Key Takeaways
- Budget = plan matching income to expenditure; surplus when income > spending.
- Separate fixed costs from variable costs to identify where cuts are possible.
- The 50/30/20 rule: 50% needs, 30% wants, 20% savings.
- Divide annual expenses by 12 to include them in a monthly budget.