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How to work out your budget

Published on:January 25, 2021Author:Emma Hartley

To some it may come naturally but for others working out and setting a budget can be overwhelming.

So let’s take it step by step.

First of all why is it important to set and work to a budget?

Whether you are living on benefits, receiving minimum wage or have an above average salary it’s important to live within your means. Without setting yourself a budget it’s easy to over spend leaving you falling into arrears on household bills or supplementing your income with credit, increasing the risk of falling into problematic debt.

It is easier now than ever to impulse buy with one click purchasing conveniently available from a smart phone without the need to even get out of bed, but do you have the surplus income available for that impulse spending?

Step 1 – What Income have you got coming in?

Make a list of what income you have coming in, whether you live alone on single salary or a family of 5 with different streams of income make a note of everything an total it up.

Example One – Natalie Example Two –
the Smith’s
Monthly Salary £1,250 Mr Salary £2,350
    Mrs Salary £1,650
    Child Benefit £91
Total £1,250 Total £4,091

Step 2 – What have you got going out?

Make a list of what you have going out, starting with your fixed bills, eg rent, mortgage, utility bills etc. Then go on to your flexible expenditure, eg food, clothing, hobbies, those expenses that can fluctuate. Once this list has been put together you will see what you need to set aside each month to cover household bills and living expenses. After this you can see what surplus is left over which can then be used to pay towards debts, savings or generic spending.

It is important to remember to take into account those outgoings that are less regular, for example MOT & Car servicing. If you can take annual expenses and break it down into monthly instalments you can put the money aside each month so that when it is due, you already have the money saved.

Example One – Natalie
Board £250
Bus Pass £65
Mobile Phone £45
Netflix £13
Gym Membership £20
Groceries £150
Clothing £50
Hairdressing £20
Toiletries £25
Hobbies £65
 
Total £703
Example Two – The Smith’s
Mortgage £1,040
Council Tax £160
Gas £75
Electricity £80
Water Rates £55
TV Licence £13
Life Insurance £45
Buildings & Contents Insurance £40
Car Finance £310
Car Insurance £65
Car MOT & Servicing £30
Car Breakdown Cover £12
Car Fuel £130
Monthly Train Pass £85
Childcare £650
Groceries £500
Nappies & Baby Supplies £50
Mobiles £65
Broadband/ Phone/TV Package £50
Gym Membership £35
Hobbies £130
Gifts £60
Clothing £80
Hairdressing £35
Toiletries £40
Total £3,835

Step 3 – Debts

Make a list of your debts. What have you got outstanding and what are you monthly repayments?

Example One –
Natalie
Debt Outstanding Balance Minimum Payment
Credit Card £1,200 £110
Store Card £250 £25
Total £1,450 £135
Example Two –
the Smith’s
Debt Type Outstanding Balance Minimum Payment
Loan #1 £6,500 £350
Loan #2 £4,000 £280
Credit Card #1 £8,000 £300
Credit Card #2 £2,500 £165
Credit Card #3 £2,000 £140
Overdraft £1,000 £35
Total £24,000 £1,270

What are the results?

Taking a look at the two examples above, Natalie takes home £1,250 per month, She needs £703 per month to live from and pays £135 a month towards her debts. This leaves Natalie with a disposable income of £412 per month. Natalie could look at clearing her debts off sooner and reducing the interest she pays by making more than the minimum payments each month.

If we take a look at the Smith’s household, they have a combined monthly income of £4,091 and need £3,835 to cover their household bills and living expenses. However the Smith’s also have unsecured debts totalling to £24,000 costing them £1,270 per month to maintain. We can see that actually they only have £256 per month left over to cover their debts, once their household bills and living expenses are paid. If The Smith’s do not seek advice in relation to their debts, they will either continue to supplement their income using credit until they have reached their credit limits, increasing their problematic debts or they may fall behind on their payments. Without the correct advice they could open up the risk of their unsecured debts being secured on their property if creditors take action to secure a charging order.

The Smith’s circumstances are not uncommon and is a fine example as to why you should set yourself a budget and seek the help and advice you need if you find yourself in a similar situation, where your income doesn’t cover your household expenditure and living expenses AND your debt repayments.

We have a handy Debt Calculator tool on our website to help you work out your budget.

Who can I speak to about my budget and debts ?

To work through or budget or for full debt advice and whether any of our available debt solutions would be the best option for you to get out of debt, you can speak to one of our advisors directly on 0800 085 1825.

The Debt Advisor Ltd is regulated by The Financial Conduct Authority. This means we are able to offer debt advice and deliver both formal and informal solutions. All debt solutions need to be carefully considered and you must take independent debt advice. We hope that the information and debt advice on this site including Frequently Asked Questions, will help inform you.

There are sources of free debt advice and services. You can find out more by contacting the Money Advice Service on 0800 138 7777 or by visiting their website.