Financial planning on a budget:
how to save and invest on a budget

Person sits at desk with coffee and planner.

What are your goals for the future? 

Do you dream of owning a holiday home, buying a boat and retiring at 45? Maybe you want to start your own business or travel around the world, or maybe you just want to feel financially secure?

No matter how big your goal, it all starts the same way – with a financial plan.

As much as we’d all like to win the lottery and not have to worry about planning our money, for the majority of us, a financial plan is the best way to map out and achieve your goals, both short and long-term.

And investing? It’s not just for city brokers shouting on a trading floor. The truth is that anyone can invest, as long as they’re comfortable with the risk and type of investment. Investing is simply putting your money into something with the hope of making more money than you put in (and the knowledge that you might not). You just need to make sure you’re clued up and approach investing in a calm and considered way. 

It might seem like you need a lot of money to start transforming your finances – but you don’t. We can help you figure out how to get closer to achieving your dreams. You can start saving and investing with as little as £10 – and we’ll show you how.

Our financial planning and budgeting guide is for anyone who:

  • Has big plans for the future, with specific financial goals in mind, like buying a house, retiring early or not having to worry about money
  • Would like to know more about saving and investing 
  • Thinks investing is only for the rich

First steps: understanding budgeting, financial planning and investments

Ready to overhaul your finances? Money may seem confusing if you don’t know what to do with yours, but there’s no secret to getting your personal finances in shape – it’s all about planning.

It’s never too late to get to grips with financial planning, so we’ve broken down what you need to know to get started. 

What is a financial plan?

A financial plan is simply a plan for your money that helps you improve your financial position.

Making a financial plan involves looking at your current finances, deciding what goals you want to reach and creating steps for achieving them.

Your plan will take into account your cash flow (what comes in, what goes out), any debt you owe, any investments you might have, any savings and even things like insurance and wills.

Who can help me create a financial plan?

You’ve probably heard of independent financial advisors, who are regulated to give specific financial advice and product recommendations. They’re typically expensive and it’s usually only profitable for them to work with people who have over £100,000 to invest. 

An alternative can be to work with a financial coach, who will provide you with financial guidance (not advice) and coach you to achieve your goals. 

The key difference between financial advisors and financial coaches is that financial advisors are authorised by the Financial Conduct Authority to recommend specific financial products to you (e.g. a specific investment fund). A financial coach, on the other hand, is usually not as highly qualified and isn’t authorised to recommend specific products. However, they’re still highly trained and can discuss your financial situation with you, explain your options and help you build healthy financial habits.


On Claro, you can get access to a financial coach, whatever your situation and however much money you have to invest. Sign up to our waitlist for early access to our app. When investing, your capital is at risk.

The difference between a financial plan vs a budget

A budget balances all your incomings and outgoings – everything you earn and everything you spend. It tends to focus on just your real-time cash flow, so you can see exactly where you’re spending the money that you make. 

A financial plan takes a wider approach. It looks at all your assets (like your house or any existing savings) and your liabilities (any debts or loans you have). 

Budgeting is a big part of financial planning, because it’s essential you understand where you are with your finances right now. But then a financial plan takes that budget further, looking at what you can save on your budget, what you can invest, and what the future might look like.

Why create a financial plan?

If you’re thinking about your future – and the money you’ll need for it – then it’s well worth creating a financial plan. Just by thinking about your future goals, you’re already starting to make one! 

Creating a financial plan is the best way to manage your finances. It will help you focus on what you need to do now and what you might want to consider in the future. It gives you a roadmap to the life you want.

There are many reasons why you might want one. You might want to save for a deposit on a house, or maybe you need an emergency fund in case anything happens with your job. Or perhaps you’d like to make sure you won’t need to worry about money when you retire. 

A well-rounded financial plan is within your reach, so don’t fall into the trap of thinking that you don’t earn enough money to consider putting money into savings pots, house funds, wedding funds, pensions or life insurance. 

The great thing about money is that it works the same way for everyone. This means that although wealthier people may be able to put more aside every month, the techniques, products and frameworks are the same for everyone (except maybe for the mega rich). 

The sooner you create a financial plan and start saving, the better. 

A financial plan makes sure you’re doing the right things: budgeting well, saving where you can, and investing to meet your goals. When investing, your capital is at risk.

7 financial goals you might want to start planning for

No matter what your budget, now is the perfect time to start a financial plan. 

Because the sooner you can start organising your finances and setting out your future goals, the sooner you can begin saving and investing to work towards them. 

And the sooner you start saving and investing, the more time you’ll have to generate interest or returns. You can also start gaining compound interest – which is, essentially, interest on interest. This interest will continue adding up over time, meaning that your balance will keep growing at an increasing rate.


It’s worth remembering that cash is no longer king – interest rates are at a historic low, and we may even be hit by negative interest rates, meaning you’d have to pay to hold your money in a savings account. This may make investing a more appealing solution for long term goals (remember, your money is safer held in cash for short term goals, or an emergency fund, for example).

The longer you can save or invest for, the more money you stand to make.

If you start sooner, you can start small too. 

Here are seven financial goals you might want to start planning for: 

  • A new home – you’ll usually need at least 5% of your home’s value saved as a deposit, and the recommended amount is closer to 20%.  
  • A wedding – whether a wedding’s on the near horizon or far away, it could be worth saving for – the average cost of a wedding in the UK was £16,005 in 2020.
  • Children – if kids are on the cards in the future, you might want to start saving now so you can support them through school and university. Research has found that it costs £79,176 to raise a boy and £108,884 for a girl.
  • Retirement – if you want security in the future when you retire, the earlier you start saving, the better.
  • Travel – got your heart set on a (post-COVID vaccine) round-the-world trip? You’ll need some savings.
  • An emergency fund – a good rule of thumb is to have at least 3 months’ worth of expenses saved for emergencies, such as losing your job, emergency home repairs or a vet bill.
  • A nest egg – maybe you have a specific goal in mind – or maybe you just want a nice lump sum in the future.

Different types of savings and investments may be suited to different goals. Some of the savings and investment accounts available are:

Saving:

  • Lifetime ISA
  • Help to Buy ISA
  • Cash ISA
  • JISA (Junior ISA)
  • Savings account (easy access, regular saver, notice saver)
  • Bonds
  • Kid’s savings account

Investing (capital at risk):

  • Stocks & Shares ISA
  • General Investment Account (GIA)

With a financial plan in place, small, regular savings or investments can help you reach your money goals – whatever your budget. 

The benefits of small, regular investments

It’s easy to think that just having a small amount of money to invest each month might not be ‘worth it’. 

But in reality, small regular investments are the perfect way to reach your financial goals. Those small steps you take now can help you achieve big things in the future.

The key reason to start – as well as compound interest, which we’ll discuss in a minute – is that it means you’re changing your financial habits. You’re making the decision to start preparing for your future.

You’re setting goals and changing the way you think about money. And seeing that regular amount adding up each month will encourage you to go on.

Other benefits of small, regular investments:

  • You won’t notice or miss a small amount of money leaving your account each month 
  • You can automate your investments so you don’t even need to think about saving each month 
  • You’re adding to investment fund regularly to keep earning greater returns 
  • You can weather the highs and lows of the market if you choose an investment path 

Because markets go up and down, making one large lump sum investment might expose you to the risk of entering the market at peak performance. But with regular periodic investments, any significant ups and downs of the market can be smoothened.

Remember, when investing, your capital is at risk.

How small is too small?

You don’t need to have thousands of pounds to invest regularly. The right investment amount for you is the amount you can afford to set aside – even if it’s £10 a month.

How to budget: the 50:30:20 rule

The 50:30:20 rule is an easy budgeting rule that some people use to decide how much they should spend on savings. The basic rule is to spend 50% of your earnings on needs, 30% on wants and 20% savings or debt repayments.

Everyone is different. It’s important that you work to a budget that makes sense for you. So if 50/30/20 needs to become 50/35/15 or 45/30/25, feel free to play around with the percentages. 

The important thing is that whatever budget you come up with, stick to it. Creating a budget is the first, most essential financial planning step on your path to financial freedom.

To make it easy for you, we’ve created a handy budget sheet.

Small amounts = big changes

You don’t need to have big reserves of cash to benefit from a financial investment plan. 

Small amounts make a big difference because you’re building good financial habits. You’re committing to regular savings and you’re making a start. If you begin to earn more, you can continue to save more and invest more. 

Plus, those small amounts add up, even though it might not seem like it at the time. 

With small, regular investments or savings, you benefit from compound interest or compounded returns. That’s where you make a return or earn interest on your initial investment, and then you make a return on that return, or you earn interest off that interest – it’s no wonder that Albert Einstein called it the 8th wonder of the world!

Your money compounds, growing with the amounts you put in and growing from the interest or returns you’ve already made. 

Say you invested £100 a month with a return of 5% each month. After month one, you’d have £105. After 12 months of investing £100, you’d expect to have £1200 + 5%. £1260. But that’s only a 5% increase on your initial investment. You actually make a 5% return on the amount each month – and that amount grows each month. 

After month one, you have £105. After month two, you have £205 + 5% = £215.25. After twelve months you have £1671.30. Four hundred pounds more. 

It goes to show how small, regular amounts can quickly add up. Typically, many financial institutions report on yearly interest, but you may see some that calculate interest monthly but pay yearly – so make sure to look out for the interest calculation term.

And it emphasises the importance – and the benefits – of having a financial plan. Whatever your budget might be.

A typical 30 year plan

According to the Association of Investment Companies, if you’d invested £50 every month for the last 30 years in an average investment fund, it would now be worth £94,450. You only saved £600 a year, £18,000 in total – but by investing it, you made over £75,000.

When investing, your capital is at risk.

Next steps: creating your financial plan on a budget

Every financial plan is unique. It’s unique to your goals, your budget and your attitudes. It should be based on your individual preferences, habits, beliefs and ideas about your future. 

So it doesn’t matter what your investment budget is. Your financial plan can be tailored to any amount. 

Save money and invest small amounts by creating your own financial plan. 

The following steps will help you get started: 

1 – Pay off before you pay in

Before you start saving and investing your money, you should pay off any debts or loans you might have. This includes all unsecured loans like credit cards, store cards, overdrafts and short term loans. 

Take a look at the interest rate you’re paying on your debts – is it over 5%? In that case, you’ll need to concentrate on paying that off first, because chances are, you’ll be paying more in interest than you’d be making on most investments. As eager as you might be to start saving, not paying down your debt will cost you more in the long run, so make this your priority.

2 – Build a rainy day fund

In life, you never know what’s around the corner, so you’ll want to be prepared for those unexpected moments. The last thing you’ll want is to end up getting into debt just to get you through those times, or having to eat into the savings you’d earmarked for a house deposit.

As a general rule of thumb, you should aim to have at least three months’ expenses – or six months for families – as a safety net, kept somewhere low-risk like a savings account. That way, if the worst were to happen, it’s one less thing to worry about.

3 – Map out what you spend and save each month

When you’ve paid off any debt and set aside your rainy day fund, you’ll get a clear picture of your day to day finances. 

Take a look at bank statements for the last 12 months (because one month might not represent your average spends) and note down everything you pay out for, and everything that’s paid in (your wage and any other income). This will help you stay on top of your finances and see exactly how much you can afford to invest each month as part of your financial plan. 

4 – Get smart about taxes

If you’re an employee, chances are you don’t really give taxes a second thought, as they’re automatically deducted from your salary – but actually, you’re missing a trick. There are many ways that most of us can reduce our tax bill and boost our take-home pay.

For example, if you have an ISA, you can take advantage of your tax-free annual allowance, where you can save up to £20,000 a year without paying taxes on your savings. If you’re married, you could look into marriage allowance, an often-overlooked tax perk that lets the lower-earning partner transfer their unused personal allowance to the higher earner.

No matter if you’re an employee, an employer, married, single or other, it’s worth having a look to see if you can reduce your taxes.

Remember that tax depends on your individual circumstances and may change in the future.

5 – Write out the future goals for your money

Next, you’ll need to decide what your future financial goals are – generally, it works best to focus on 2 to 3 core goals.

Ask yourself why you want to invest, and write down your answers so you have a definitive goal to work towards. 

Do you want to invest in a pension so you can have a happy, worry-free retirement? Do you need to save £25,000 for a deposit for a house? Do you want to build up a nest-egg for your children?

Getting as specific as possible with your goals will help you decide the best ways to implement your financial plan. 

6 – Think about timings

If you know what your future goals are, you should already have an understanding of the timings involved with your investments and your financial planning. 

Investing in a pension will lock away your money usually until you are 55 years old, so you need to be comfortable with the fact you can’t access your money until then.

If you want to save for a house, a wedding or another big spend in the near future, then you might want to focus on saving opportunities that won’t tie up your money. You might start with a savings account with a fixed interest that limits withdrawals for one or two years, to help get used to the idea of investing for the long term.   

Ideally, investments should be made on as long a term as possible, for 3, 5, and 10+ years.This will help you weather market highs and lows and generate the best returns.

7 – Figure out your attitude towards risk

Planning out how long you can invest for will also help you decide what your attitude to risk is. 

Remember, there’s a reason all investments carry statements like “past returns are not an indicator of future performance. Your investment could go down as well as up.”

When you invest, you’re taking a risk with your money. Bigger risks can generate bigger rewards… but they might not. You’ll need to understand what’s at stake and be prepared to take the risks. 

If you’re starting young and investing for your future retirement, you’ll have many years ahead of you. That means you can afford to take more risks because you’ve got much longer to recover any losses or downturns. As you near retirement, you’ll want the risk of your investments to reduce as much as possible so that you’ll be able to draw down your cash.

If you’re not keen on taking any risks, then you might invest in a savings account that earns interest on your balance. (Although at present, interest rates are at a record low).

8 – Choose how you want to invest or save

Goals set. Timings planned. Risk decided. Now you can look at how and where you’d like to invest. 

This is where your financial plan is essential. It will help you see where you should be investing or saving, based on your goals and preferences. 

There are many different types of investments, including: 

  • Stocks and shares
  • Index funds (e.g. FTSE100)
  • ETFs (Electronically Traded Funds)
  • Government or corporate bonds 
  • Commodities (e.g. gold, sugar, oil)
  • Forex (currency pairs USD: GBP)
  • Crypto

Take the time to learn about the pros and cons about each type of investment, including which are higher and lower risk and which are short or longer-term products. Once you know this, you’ll be able to match the investment opportunities to your own financial goals and timelines to find the right products.
If you want to invest ethically for example, or you’re concerned about the environment, then you might want to look more closely at ESG investments.

Where do millennials invest their money?

According to a survey of 25-34 year olds by the FCA

  • 48% hold a direct contribution pension
  • 14% hold a direct benefit pension 
  • 8% have premium bonds
  • 7% have a stocks and shares ISA
  • 34% have a cash ISA
9 – Look at automating your investments and/or savings

Technology has transformed the way we plan our finances and invest for the future. If you’re looking to save and invest on a budget, it can be a huge help. 

A great way to use this to your advantage is by setting up standing orders. You can set them up to take an allocated amount of money out of your current account as soon as you get paid, and transferred elsewhere, such as a savings account. 

Automation means you don’t have to remember each month to put money aside – it’s already done for you.

10 – Spread your risk

Whatever technology you choose to use and wherever you invest, it’s important that you don’t put your eggs all in one basket. 

You should always look to spread your risk. So if you’re investing in stocks and shares, instead of putting all your money into one company, you could spread it around several. Or you might choose to invest some money in stocks, some money in a pension fund and some into a savings account. 

This is known as diversification, a risk management strategy where a portfolio contains a variety of investments, including different types of assets, so that your exposure to any one single asset type is limited. Diversification helps to minimise the risk of loss – as you aren’t concentrating all of your capital in one type of investment –  preserves capital, and can generate stable returns.

That way, you’re always covered, whatever the future holds.

11 – Always revisit your financial plan

Finally, remember that your circumstances will change. Life doesn’t stand still, so neither should your financial plan. 

Try and revisit your plan at least once a year, or more often if something has changed in your life or there’s a new goal you’re working towards.

It will help you check your goals are still the same, and your financial strategies – your investments – are still working for you.

Make the most of your financial plan – whatever your budget

Although every financial plan is different, personal to your circumstances, there are a few things that everyone can do – whatever your budget is. 

Always try and reduce costs and unnecessary expenses as much as possible. Always take advantage of any incentives or employer contributions. And always look to where you can reduce taxes and fees (be sure to use your ISA allowance for tax free savings.) 

Maximise and minimise. 

That way, you can be smart with your financial planning, whatever your budget.

*Sources
http://covi.org.uk/dev4/wp-content/uploads/2020/03/Millennials-and-Money-summary-report_Common-Vision-FINAL.pdf
http://covi.org.uk/dev4/wp-content/uploads/2020/03/Millennials-and-Money-summary-report_Common-Vision-FINAL.pdf&sa=D&ust=1604335752924000&usg=AOvVaw31AoR29KjUOQFt7a-XsQpH