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Managing my money
Managing my money

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3.1.5 The budget – the average month

The information in the cash flow statement shows one month only. May 2018 may not be a typical month. There will be some commitments that only come up every so often, such as road tax, quarterly bills, TV licence and other occasional spending such as going on holiday, buying a new piece of furniture or buying Christmas presents. This is why people can sometimes underestimate their spending. For budgeting, an ‘average’ or ‘typical’ month is needed.

Table 2 Jenny's budget in May 2018
Cash flow (£ per month)Average month (£ per month)Budget (£ per month)
EarningsTotal 1115Total 1115Total 1115
TOTAL NET INCOME 111511151115
Council Tax505050
Regular bills (gas, electricity, water, etc.)306050
Telephone (mobile and landline)404030
Home insurance (contents and building)121210
Household goods153030
Food and non-alcoholic drinks150150120
Clothing and footwear505040
Medicines, toiletries, hairdressing (personal)303030
Going out12012080
Holidays/other leisure2010050
Motoring costs (insurance, petrol)70130180
Birthday presents/charity/other gifts
Christmas presents/gifts104530
Personal loan repayments100100100
TOTAL EXPENDITURETotal 1017Total 1237Total 1090

A budget has to include all expenditure – it’s very important that irregular expenditure or occasional items are included. This is normally achieved by recording the amount of any such payment, and the frequency at which it occurs, and recalculating it as an equivalent monthly figure. For example, if electricity charges are £180 for a year, this is recalculated as a monthly figure of £15 (£180 per year, divided by 12 months). If Jenny spends £600 on a holiday once a year, then this would equal £50 per month.

Similarly, if, in the month of recording the cash flow statement, Jenny were to undertake a once-a-year expenditure, this would need to be annualised, which would reduce the monthly expenditure figure by spreading that sum across all 12 months. Starting with a cash flow statement and averaging out the more infrequent expenditure should produce a reasonably accurate picture of current income and expenditure per month.

An additional point to be wary of is double counting when using a credit card for a purchase. Suppose you buy a television for £500 using your credit card, and record the purchase as an expenditure item of £500 in that month’s cash flow statement. If, in the following month, you pay off your credit card in full, you might record the £500 a second time as a credit card payment: that is, you’ve counted it twice even though you’ve only spent £500.

One possible option is to add an additional column in your cash flow statement that itemises credit card purchases, so you can track what you’re spending money on, but only record the payment being made once you’ve paid off the purchase on your credit card.

Another option is to have a series of subcategories under credit card purchases that itemise what you’ve bought on the credit card. Whichever technique you use, make sure you regularly update and review your cash flow statement, ensuring that items are only recorded once.

Jenny’s average monthly expenditure and net income are shown in the second column in the table. This provides a more accurate picture of Jenny’s finances by looking at monthly, rather than at one specific month’s, income and expenditure. With these estimates of monthly spending and income recorded, the ‘reality check’ is complete and an assessment can be made about the expenditure and income situation.

With these adjustments to gain a more accurate monthly picture, you can see that Jenny’s expenditure actually exceeds her income by £122 per month. This is very different from her initial cash flow estimate of a £98 surplus.