Level 2: Build a Budget That Works

Educational only. This lesson explains how budgeting works and is not financial advice. The examples use UK terms such as council tax. The method works anywhere, but bills and terms differ in other countries.

In Level 1 you made a spending map showing what comes in and where it goes. A map shows the past. A budget is a plan for the next month: you decide in advance how much each category is allowed to use. In this level you will:

1. Set a limit for every category
2. Make sure the plan does not spend more than you earn
3. Compare the plan with what really happened
4. Set a simple routine for reviewing it

Step 1: Sort Your Categories into Three Groups

Open your spending map and give each category one of these labels:

• Essential: costs you must pay to live and work, such as rent or mortgage, council tax, energy, water, food shopping, phone and broadband, and travel to work.
• Flexible: costs you choose and could cut back, such as eating out, takeaways, clothes, streaming subscriptions and hobbies.
• Saving: money you set aside on purpose. Treat it as a category with its own limit, not as whatever happens to be left over.

Do: Add a column called Type to your spreadsheet and fill in Essential, Flexible or Saving on every row.

Step 2: Set a Monthly Limit for Each Category

Start with your take-home income: the amount that actually reaches your bank account after deductions. Plan with that figure, never with your salary before tax.

1. Fill in the essentials first, using real figures from your bills and statements.
2. Add a realistic saving amount.
3. Share what remains among your flexible categories.
4. For irregular costs (car service, birthdays, annual subscriptions), divide the yearly cost by 12 and budget that amount each month. For example, a £180 yearly bill becomes £15 a month.

A common rule of thumb, the 50/30/20 rule, suggests about 50% of take-home pay for needs, 30% for wants and 20% for saving. Use it as a rough check, not a rule you have to follow. In much of the UK, housing alone can take more than half of someone's income.

Worked example: Sam takes home £2,100 a month

Essentials come to £1,455, flexible spending to £295 and saving to £350.

Step 3: Make Every Pound Have a Job

Add two cells under your table:

• Total budget: =SUM(C2:C12)
• Surplus or shortfall: =Income - Total budget

How to read the result:

• Positive (surplus): some money has no job yet. Assign it, usually to saving, until the cell shows £0.
• Negative (shortfall): you plan to spend more than you earn. Reduce your limits, starting with flexible spending, until the cell reaches £0 or above.
• Zero: every pound of income has been assigned.

If Sam had budgeted only £250 for saving, the cell would show £100: money with no job. Moving that £100 into saving brings it to £0.

Step 4: Compare Budget with Actual

At the end of the month, add two columns:

• Actual: what you really spent, taken from your bank statement
• Difference: =Budget - Actual

A negative difference means you went over. Sam's month:

Food and eating out went over. Travel came in under budget.

Do: Use conditional formatting to turn negative differences red so overspends are easy to spot.

Step 5: Set a Review Routine

A budget only works if you look at it regularly.

1. Weekly (10 minutes): check your spending so far against each limit.
2. Monthly: fill in the Actual column, find every category that went over and ask why.
3. Adjust: if a limit is always broken, it is probably unrealistic. Raise it and lower another limit by the same amount so the surplus/shortfall cell stays at £0 or above.
4. When life changes (new job, move, pay rise): rebuild the budget from Step 2.

If you would like a guided version, MoneyHelper's free Budget Planner groups your spending into categories, and you can download your results as a spreadsheet.

Your Task: Build and Check Your Budget

1. Copy your Level 1 spending map into a new sheet with the columns: Category, Type, Budget, Actual, Difference.
2. Enter your monthly take-home income in its own cell.
3. Set a budget limit for every category, including Saving.
4. Add the Total budget and Surplus/shortfall formulas.

Check your work:

• The Surplus/shortfall cell equals income minus the total budget. Test it by changing one limit by £10: the cell should move by £10.
• The cell shows £0 or a small positive amount you have consciously left as spare. It is never negative.
• The Difference column is Budget minus Actual, and overspends show as negative.
• Every category has a Type and a limit. None are blank.

Key Takeaways

• A budget plans ahead. It sets a limit for each essential, flexible and saving category.
• Build it from take-home income, never from your salary before tax.
• Surplus/shortfall = income − total budget. Aim for £0, so every pound has a job.
• Fix a shortfall by trimming flexible spending first.
• Spread irregular costs by dividing the yearly cost by 12.
• Difference = Budget − Actual. A negative figure means that category went over.
• Check weekly, review monthly and adjust limits that are unrealistic.