Budgeting

Budgeting is all about understanding and controlling your finances: your income (all the money you receive) and your expenditure (all the money you spend).

Income & expenditure

Budgeting starts with understanding exactly how much money comes into your household, and where it all goes. When you write down your monthly income and expenditure, make sure you involve everyone who contributes and / or spends money.

If there's time, it's worth taking a month to write down everything you spend. If you can't wait a month, you'll have to do it from memory, receipts, bank statements and so on - you won't get such a realistic picture, but you'll be able to take action sooner.

You need to figure out your total income and total expenditure.

Total income
List everything your household earns or receives: salary (a realistic average if you regularly earn bonus/overtime), benefits, grants, child maintenance, etc.

Total expenditure
Now write down everything your household has to spend: first, your priority debts (mortgage / rent, utility bills, secured loans, etc.) and your day-to-day essential living expenses.
Don't include your non-priority debts (personal loans, credit cards, store cards, etc.), or your spending on luxury items at this stage. Once you're confident you've made an allowance for all your essential living expenses, you can calculate your disposable income.

Total income minus Total expenditure = Disposable income

Disposable income

This is the amount available to pay towards your debts and - if there is enough left over - saving and non-essential luxury items.

Once you've figured out your disposable income, list the monthly repayments to all your non-priority debts - your loans, credit or store cards, catalogues, etc. The question is: Is your disposable income enough to cover the repayments you should be making every month?

  • If it isn't big enough, it's vital that you take action. What you need to do will depend on your circumstances, whether the situation is short or long-term, what you owe and what you can afford. Research the solutions available or take advice. Make your creditors aware of your situation. For more on this, see Talking to creditors.
  • Even if it is big enough, you'll save yourself a lot of money in interest charges if you can make more than your minimum monthly payments. If you owe 6,000 on credit cards, store cards and overdrafts, you're probably paying well over 1,000 interest every year. So once you've set aside enough to pay the minimum on all your debts, put all / most of the rest towards the debts charging the most interest.

Maximising your disposable income

Whatever your situation, it's always a good idea to look into increasing your disposable income. There are two ways you can do this:

Increase your income
For example:

  • Are you receiving all the benefits you're entitled to?
  • Could you work longer hours or get a second job?
  • Could you take in a lodger?

Reduce your expenditure
For example:

  • Are you entitled to any tax reductions / exemptions?
  • Do you have any savings you could use to pay off debts?
  • Are there any luxuries you could live without for a while?
  • Could you switch to a cheaper utility supplier?
  • Changing from quarterly bills to monthly bills can help you manage your cash-flow better.

Apart from improving your situation, maximising your disposable income could also help you negotiate with your creditors. When they see that you're doing everything you can to 'free up' money and repay your debts, they're more likely to accept lower payments, agree to reduce / freeze interest, or give you a payment holiday.

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