Our page on Budgeting and Money Management explains how to draw up a monthly budget. It describes a process of establishing your monthly income and essential and desirable spending, as well as setting aside money for contingencies. In an ideal world, this allows you at least some discretionary spending each month, on luxuries and non-essentials.

However, this is not an ideal world. Plenty of people find that they are spending more than their income each month. If this happens, you have two options. You can either reduce your outgoings and spend less, or you can earn more money.

This page covers the first of those two options, and gives you some ideas for how to prioritise your spending.

Knowledge is Power

When you discover that your outgoings are higher than your income, you may be tempted to ignore that information. After all, it’s much easier to pretend nothing is wrong.

However, in this case, knowledge is very much power, because once you know, you can do something about the situation.

There are a number of steps to working out where to spend less, and how to do it.

1. Understanding Your Situation

Your first step is to understand your income and exactly what you are spending, and on what.

Take some time—ideally several weeks, if not a full month—to track both your income and your spending. You can either just keep this information in a notebook or account book, use a spreadsheet, or try one of the many money management apps now available.

Remember to include all your fixed-price items, such as rent or mortgage, insurance, utilities, and any phone, streaming and other entertainment services. Also consider any items that you pay for once a year, just as you do when budgeting. Realistically, you need to include one-twelfth of each of these in your spending each month.

2. Categorise Your Spending

The next step is to categorise your spending into essential and desirable: needs and wants, if you prefer.

Essential is those things that you really need to survive or be able to do your job. These are things like food, a home, transport to or from work, and heating or air conditioning for your home. It is also reasonable to include clothes, including work clothes. However, you also have to be realistic here.

• Essential is having clothes to wear. However, you could buy them from a charity (thrift) shop or discount warehouse. Essential might also mean being able to buy new clothes for your children as they grow. Desirable might be buying designer clothes and goods, or having something new to wear each month, or even buying new clothes for yourself.

• Essential is being able to eat lunch each day. However, you could buy food at the supermarket and make sandwiches to take in each day. Desirable might be buying food in the expensive sandwich shop down the road from the office, or going out for lunch with your friends.

It is therefore worth considering some sub-categories, such as ‘broadly essential but the cost could be reduced’ or ‘essential, but not necessarily in this form’.

3. Look for Obvious Areas for Reductions

The third step is to look for obvious areas where you might be able to make savings.

These will include:

• Spending that is purely desirable: the regular latte on the way to work, for example, or those fabulous shoes that were a real bargain in the sale, or your streaming service. This category is very much things that are nice to have, but your world would not end if you didn’t have them.

• Spending on areas that are essential, but items that are not: this includes buying sandwiches at work, or more expensive clothes. Some of this spending will be one-off, but some may be more regular. You may, for example, be paying for a big car when you could actually get by with a much smaller, cheaper one.

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4. Look For Less-Obvious Savings Areas

Once you have considered the most obvious savings areas, it is worth considering the less obvious areas. These include reducing essential spending by changing your habits.

At this stage, it is worth looking at every category of your spending to see what you can reduce and how.

• For example, you might be able to buy groceries more cheaply if you shop at a different supermarket, order some items in bulk online (assuming you can afford to do this, and have the necessary storage space), or change the brands you buy to cheaper ones or supermarket own-brands.

• You may also find that agreeing to pay utility bills by direct debit, or moving to paperless billing, can save you considerable amounts each month. Switching providers is also an option for utilities, including broadband. These savings may take longer to deliver, or even to organise, but are worth looking into.

It is even worth considering things like your bank account. If you have an account that provides perks but has a monthly fee, check whether you actually use any of the perks—and if so, whether the perk is worth more than the fee. If not, move to a different account without fees.

During this process, it is very much worth examining every item of your spending to see what you can do to reduce it.

5. Cost Your Savings

Now you need to cost up your savings. How much will each change save you each month?

You need to be realistic here. For example, if you say that you are going to take lunch each day, you need to budget for buying extra food from the supermarket to do this. This can add up quite quickly, especially if you are not careful about what you buy. Do your research and check how much it will realistically cost. Being over-optimistic will not help you.

You also need to be clear when these savings will apply. It is no good deciding to change your phone contract in a year’s time, and then including the savings immediately. Start by adding up the most immediate savings, and then set out when others will start to apply.

This will give you a clear idea of the savings that you can make on your previous spending pattern.

6. The Acid Test: Will Your Savings Meet Your Needs?

The (potentially) final step is to check whether your savings will meet your needs.

In other words, once you have reduced your spending in all the ways that you have identified, will your outgoings be less than your income?

If the answer is yes, then you can simply start to implement your planned savings. Remember to make the longer-term savings too, because your expenses will only increase over time.

If the answer is no, then go back to the start of Step 3 and have another look for more possible savings. Repeat as necessary until you have reached your desired point.

7. Bonus Step: Check If Cashflow is a Problem

There is one other step that is worth considering. Take a few minutes to check whether you actually have an income/expenses imbalance, or if your problem is cashflow-related.

You may have enough money entering your life to cover your expenses, but at the wrong time.

This problem usually manifests in becoming overdrawn at certain times of the month, even though you have more money going into your bank account than coming out. This can happen if you have direct debits or standing orders going out on a fixed day, but your income is more flexible. Some employers pay on the last Friday of the month, for example, not a fixed day, and freelancers often have this problem too.

If this is your problem, you may be able to overcome it by rescheduling some or all of your regular payments. You may find it better to have them spread out throughout the month, or paid on a different day.

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A Final Thought

This page describes a process you can use to start to identify some areas for potential saving and get on top of your expenses. However, actually delivering can prove more difficult. You may need to exercise considerable willpower to make changes like making sandwiches each day, or not buying a latte on the way to work—especially on a bad day.

It is therefore important to ensure that you are motivated and fully committed to your changes.

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