Money makeover - day three

Use the free budget planner and find out how to save £1,000s giving yourself a money makeover, according to our Money Saving Expert Martin Lewis

Step 1: Do you spend more than you earn?

Do a budget properly and you'll immediately discover if you spend more than you earn, and can then prioritise your outgoings to remedy it.   Yet most budgets are nonsense as they focus on a typical month, forgetting daily pastries, weekly shops, annual holidays and more. For example, spend £600 on Christmas, and you need to factor it in at £50 a month.

To do a proper budget it you need to gather a few months worth of bills and make some time.  You can either do it on paper or I've developed some tools that do the whole process for you.

Martin's free budget planners are available via the useful links section.

Step 2: Pain-free savings – cut bills without cutting back

If you spend more than you earn – or even if you don't – you should try to make pain-free savings. This includes getting the best bank account, shopping around for the cheapest contact lenses, paying less for medication, cutting the cost of travel and more. The best part is, it involves no lifestyle change, so you won't notice the difference, except for in your wallet.

Don't just think this is about credit cards, benefits, mortgages, and car insurance though – you can also save on childcare, council tax and energy too.  In fact, you need to go through everything you spend money on to see if you can do it for less.

The useful links section has some specific examples, and a full money makeover guide which takes you step-by-step through all the possible savings.

Step 3: Still spend more than you earn?

Now it's worth revisiting your budget, incorporating your new predicted expenditure based on the expected pain-free savings.  What you do thereafter depends on the result.

• Are you spending within your means?   Congrats! You need do nothing more – unless you'd like to start saving or repay more debt-  but it's important to keep monitoring your finances. Effective budgeting is still worthwhile too (see step 5).

• Spending more than you earn?    If even after pain-free savings you're still overspending, then it's time for step 4.

Step 4: Cutting back - painful savings

If you are still spending more than you earn – you are in danger of a debt spiral.  That's where to maintain your lifestyle you need to keep borrowing – so the debt grows until all your income is taken up repaying it.  Then you're really in trouble.

At this point, there's no choice but to start cutting back. This could be as easy as getting rid of subscription TV and taking your own sandwiches to work, or never going out and minimising on all expenditure. It depends entirely on the severity of your circumstances.

And if you're struggling to meet even the minimum repayments on debts, it's likely you need urgent guidance. Speak to free non-profit, non-judgmental debt crisis agencies like Citizens Advice (check the Yellow Pages for your local office), Consumer Credit Counselling Service (CCCS – 0800 138 111), Christians Against Poverty (01274 760 720 the religious focus is why they do it, not how they do it) and National Debtline (0808 808 4000).

Step 5.  Piggybanking – stay within your budget

Making a budget work on paper is often easy – the difficulty is sticking to it.  To help you can try my 'piggybanking' technique which involves using several small accounts for different spending categories – though don't try it if it leaves one account in debt.

Once you've worked out how much you can spend in each area to give yourself a balance, budget, then set up special accounts for each of the main categories you want to save for (e.g. bills, Christmas, holiday, an emergency fund). Then when you get paid, simply have standing orders shift the right amounts from your main bank account to the piggybanks. 

Then whatever's left in your main bank account is actually spendable each month, and you know you can genuinely afford to use it.  And when you look in your holiday account it'll show you how much you can actually afford to spend on a holiday. It may not be what you wanted, but it's what's right to keep your finances under control.