Part 2: Learn how to budget money

In the previous article, we looked at the first two steps of how to budget money.

In step one you pulled together all your sources of income so you know how much money you have each month. In the second step, you looked at where you spent your money. These are the basics of how to budget.

By now, you should be quite clear on your income and outgoings and have filled in a budget worksheet.

You're now ready to start working that budget and getting closer to your objective.

Step 3: Review and revise your monthly budget

You should have filled in your monthly budget worksheet and so you'll know whether you're living within your means or how much you're overspending. When filling out the worksheet, you were probably surprised at how much you spent in certain areas. It's these areas where you can begin to save money, reducing your monthly outgoings.

You should review carefully each line item to see whether you can save in that area. Ask yourself if you really need a particular item or can you reduce the amount you pay for something. Obviously, you can't live without a roof over your head or not pay your council tax, but there will be plenty of things that you spend your money on that are non-essential. With these items you can either cut them out or reduce them significantly. Most of these things will be lifestyle choices where you can easily save. Learn more about making a budget work for you.

You should keep going until what you spend is less than, or equal to your income. Consider some of the following actions:

• Getting a better deal on your mortgage or negotiating your rent
• Looking at your debt payments and see how you can reduce the amount you pay
• Reviewing your energy bills and seeing if you can save there. Uswitch.co.uk is a great starting point to see if you can save on your energy bills
• Spending less on your weekly food shop
• Reviewing all your monthly subscriptions
• Review your going out/entertainment allowance

How to budget money shows you there are plenty of ways to reduce your monthly outgoings. These budgeting tips will make it much easier for you.

Step 4: Start living on your budget and within your means

Now that you've drawn up your budget, you need to stick to it. If you've completed the 'live and learn' exercise, you'll already be used to keeping a note of what you're spending, so you've probably already adjusted the way you spend dramatically.

For others, you'll simply need to be careful where and what you spend your money on. Here are some tips to keep you on track:

• Take the money you need for the week out in one go and keep it in a safe place. Then only take what you need for the day from that amount. Doing this, you can physically see where your money is going and so you'll automatically be more careful with it. Alternatively, consider using the envelope budgeting technique.
• Write down everything you spend. You'll soon cut back as you see yourself spending money on unnecessary things.
• Watch out for unforeseen items and consider carefully if you need them.

At the end of the month, you should have stuck to your budget and learnt how to budget money. You'll be one step close to your objective. That debt free life, dream holiday or a bigger pension pot is within reach!

These are the four simple steps on how to budget money. To find out more about why budgeting is important and tips on how to budget, return to About Budgeting.