How to make a budget: a simple monthly envelope method

How to make a budget in five steps

1. Add up your income for the month. Use take-home pay, after tax and deductions. If your income varies, use a cautious figure, such as your lowest month in the last six.
2. List your fixed costs. Rent or mortgage, council tax, energy, water, phone, insurance, loan repayments and subscriptions. Bank statements from the last two or three months are the quickest way to find them all.
3. Estimate everyday spending. Groceries, transport, eating out, fun. Look at what you really spent recently, not what you'd like to spend.
4. Give every pound a job. Share your income out between the categories until nothing is left unassigned. Savings and paying off debt are categories too.
5. Track and adjust. Log spending as it happens. At the end of the month, see which envelopes ran over and change next month's plan.

How the envelope method works

Envelope budgeting started with cash: people split their wages into paper envelopes labelled rent, food and so on, and when an envelope was empty, that spending stopped. A budgeting app does the same with numbers.

• Ready to assign is income that hasn't been given a job yet. Your aim is to get it to zero.
• Each envelope shows what you assigned, what you've spent and what's left.
• When an envelope runs dry, stop spending there, or move money from another envelope. Your total stays honest because the money has to come from somewhere.

How much should go where?

A common rule of thumb is 50/30/20: about half of take-home pay on needs, 30% on wants and 20% on savings and debt. It's a first draft, not a rule. Rent alone takes more than half of income for many people in big cities, and that's fine if you adjust the other parts.

If you have debts, or you're struggling to cover the essentials, free and impartial help is available. In the UK, MoneyHelper and debt charities such as StepChange and Citizens Advice can help you work out a plan.

Making your budget in the Budget app

Budget is a free envelope budget that works in your browser, with no bank login and nothing uploaded. It starts with envelopes for rent or mortgage, groceries, utilities, transport, eating out, fun and savings, which you can rename, remove or add to.

• Add income for the month. The big number at the top is what's ready to assign.
• Open an envelope to assign money to it: type an amount, use the quick amounts, or Assign the rest.
• Add spending as it happens: amount, envelope, an optional note. It takes about ten seconds.
• Move money between envelopes when one runs low.
• Look back with the arrows beside the month or the six-month chart of spending against income.

Each new month starts from last month's plan, so you only change what's different. Choose from 12 currencies in Settings, export transactions as CSV, and back up to a file to move to another device.

Common mistakes

• Budgeting with your gross salary. Use what actually reaches your account.
• Forgetting irregular costs. Annual bills and birthdays need a monthly envelope.
• Guessing everyday spending. Check what you really spent for a couple of months.
• No savings envelope. If saving is "whatever is left", usually nothing is left.
• Giving up after one overspent month. The first few months are for learning your real numbers.
• Making it too detailed. Eight to twelve envelopes is enough for most households.