Building number confidence: Budgeting
4. Budgeting steps
Step 1: Calculate your total monthly income
The first step is to ascertain how much money you have coming in, each month, including:
- your take-home pay (after tax and other deductions);
- benefits you receive, e.g. child benefit;
- any other income e.g. child support.
List these, on paper or in a spreadsheet, and add them together (a spreadsheet or budgeting app will do this for you) to find your total monthly income.
Step 2: Calculate your total monthly outgoings
Using bank statements and other financial documents (bills, credit agreements etc), list all your outgoings, both fixed and variable, separating essential, from non-essential (or 'nice to have') spending.
Fixed
These are regular monthly payments (see examples below) often set to leave your bank account via direct debit or standing order.
- Essential: rent/mortgage, gas/electricity, broadband, phone contract, insurance.
- Non-essential: gym membership, streaming services and subscriptions.
- Debts: car finance, loan repayments, credit cards, bank charges.
- Savings: regular payments to savings account or private pension.
Divide any annual payments by 12 to work out a monthly cost.
List these in a new column - under a heading 'Outgoings' - in the budget document you started in step 1.
Variable
These are payments, using cash or debit card for example, which may vary from month to month. Calculate your average monthly spend on each.
- Essential: food, car/transport costs (fuel, servicing, repairs, MOT, bus/rain fares), childcare, toiletries, ’pay as you’ mobile, dentist, optician.
- Non-essential: entertainment, eating out, days out, hobbies, impulse spending.
- Other: birthdays, Christmas, holidays.
Add these to your list of outgoings - again dividing any annual payments by 12 to work out a monthly cost - and sum them to find your total monthly outgoings.
Step 3: Compare your total income with total outgoings
Subtract your total monthly outgoings from your total monthly income. Does your income cover your total outgoings?
You may find that your monthly expenditure exceeds your current income. Can you increase the money you have coming in and/or reduce costs, for example by shopping around for better deals, or cancelling subscriptions?
If you break even, or have a surplus, reducing costs could enable you to put money aside for contingencies (emergency repairs for example), towards planned purchases or into savings.
Budgeting check
Mairi has created a monthly budget plan using a spreadsheet app.
Starting with the balance left in her bank from last month, she has set up the spreadsheet to automatically subtract each item of expenditure and update the balance.
Mairi has allocated £370 this month for weekly shopping and miscellaneous spending. Will she be able to do the same again next month if all other income and expenditure stay the same?
| Description | In | Out | Balance |
|---|---|---|---|
| Carried forward | 37.50 | ||
| Salary | 1475.00 | 1,512.50 | |
| Mortgage | 750.00 | 762.50 | |
| Council tax | 114.00 | 648.50 | |
| Broadband | 35.00 | 613.50 | |
| Phone | 24.00 | 589.50 | |
| Gas/electric | 90.00 | 499.50 | |
| TV | 13.00 | 486.50 | |
| Gym | 47.00 | 439.00 | |
| Bus to work | 64.00 | 375.50 | |
| Weekly shop & misc spending | 370.00 | 5.50 |
After paying all her fixed expenses, and setting aside £370 for shopping and miscellaneous spending, Mairi has a balance of £5.50 in her account.
Starting a new month with the £5.50 carried over, the costs she has budgeted for would result in a minus balance (-£26.50) .
| Description | In | Out | Balance |
|---|---|---|---|
| Carried forward | 5.50 | ||
| Salary | 1475.00 | 1,480.50 | |
| Mortgage | 750.00 | 730.50 0 | |
| Council tax | 114.00 | 616.50 | |
| Broadband | 35.00 | 581.50 | |
| Phone | 24.00 | 557.50 | |
| Gas/electric | 90.00 | 467.50 | |
| TV | 13.00 | 454.50 | |
| Gym | 47.00 | 407.50 | |
| Bus to work | 64.00 | 343.50 | |
| Weekly shop & misc spending | 370.00 | -26.50 |
Having the figures in front of you, particularly using a spreadsheet or app which updates the balance after each item, makes it easy to see where things are going wrong and adjustments have to be made.
We will have a look on the next page at how Mairi used her £370 allowance this month, but she may have to reduce this. It may also be possible to reduce some of her fixed expenses, for example by shopping around for better deals.