Budgeting Text Document

Make Money Make Sense

Budgeting

Definition of budget
Understanding budgeting
Formula
Income and expenditure
Income and expenditure calculator
Income
Expenditure
Disposable income
Overspending
Budgeting example 1
Budgeting example 2
Budgeting results 1
Budgeting results 2
Budgeting techniques
Calculations
Converting monthly figures to weekly
Tips for budgeting
Get help with budgeting

[1]

Budgeting

[2]

Definition of budget

• noun 1 an estimate of income and expenditure for a set period of time. 2 the amount of money needed or available for a purpose.
3 (Budget) an annual statement of national revenue and expenditure put forward by the Chancellor of the Exchequer.
• verb (budgeted, budgeting) allow or provide for in a budget
• adjective inexpensive

[3]

Understanding budgeting

Budgeting isn’t something that only politicians do.

Understanding how to budget is the key to getting to grips with your money and keeping control of your finances.

Once you have set out the basics a little time each month is all you need to keep on track.

[4]

Formula

Basically . . .
Income
minus -
Expenditure
equals =
Disposable income

[5]

Income and expenditure

The idea of budgeting is to add up all the money you have coming in over a set period of time. If you get paid weekly or monthly it is best to do the calculation on that basis.

Then you work out all the expenses you will have during that period.

You subtract the expenses from your income and see what you have left. The remainder is your disposable income which you can do with as you please.

Knowing the difference between essential spending and non-essential spending helps you avoid getting into difficulties.

[6]

Income and expenditure calculator

One of the tools we use to help people budget is an income and expenditure sheet.

This can be done as a handwritten list or by using a spreadsheet.

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Income and Expenditure Calculator
Name
Address
Date
Telephone

Income
Earnings
Partner’s earnings
Board from children
Pensions/Other benefits

Weekly/Monthly
Income support
Child benefit
Maintenance
Other (please state)

Total Income

Expenditure
Rent
Mortgage/Secured loan
Endowment policy
Council tax
Water rates
Sewerage rates
Food/Household items
Electricity
Gas
House insurance
Life insurance
Children’s pocket money
Prescriptions/Health costs
Clothes
Pets
Laundry costs
TV licence
TV rental
School meals
Travel costs and maintenance
Car insurance
Car tax
Telephone
Newspapers
Personal
Other (please state)

Total Expenditure
Income minus Expenditure

[8]

Income

We begin by completing the figures for income.

Income
Earnings
Partner’s earnings
Student loan
Grants

Weekly/Monthly
Other benefits
Other income

You may have different sources of income to those listed. Everything should be added up. The key to completing both income and expenditure is to stick to either weekly figures or monthly throughout, whichever you prefer.

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Expenditure

Then we look at expenditure, the amounts we spend regularly. The list shown here is a guide to help you remember the main expenses. If you have other expenses not listed remember to add them.

Feel free to add any additional expenses you think of.

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Disposable income

Once we have totaled up everything we subtract the expenditure figure from income. This shows us how much money we have at the end of each month, often referred to as disposable income.

Income minus expenditure = 0

When we have spent money on essentials what we have left at the end of the month is ours to do with as we please.

Hopefully this figure will be a positive amount. However when our spending is more than the money we have coming in this figure will show as a negative quantity.

[11]

Overspending

It may seem impossible – to spend more money than you have coming in – but many people do it.

It means they are using money from other sources, such as drawing on their savings or borrowing from family and friends. Or borrowing from a bank, building society or finance company.

Borrowing money can be a safe and useful thing to do but without a good idea of how much is coming in and out of your pocket, you can soon get into difficulties.

Budgeting helps you avoid this.

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Budgeting example 1

Let’s look at an example:

• Jim is 23 years old
• he has a full-time job that pays him £850 a month
• he has no other income.

Income
Earnings
Partner’s earnings
Student loan
Grant

Weekly/Monthly
Other benefits
Other income

Total Income

[13]

Budgeting example 2

• Jim rents a flat for £350 a month and that includes all bills. He does have to pay for a TV licence that costs £10 a month.

• Jim estimates he spends around £100 on food and household items and about £50 a month on clothes.

• He doesn’t have his own car yet and he spends £80 a month on bus and train fares.

• He spends around £50 a month on his mobile phone and around £60 a month on cigarettes.

• At a guess he spends about £100 a month on various things like CDs and socialising.

Let’s total those figures.

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Expenditure
Rent 350
Mortgage/Secured loan
Endowment policy
Council tax
Water rates
Sewerage rates
Food/Household items 100
Electricity
Gas
House insurance
Life insurance
Children’s pocket money
Prescriptions/Health costs
Clothes 50
Pets
Laundry costs
TV licence 10
TV rental
School meals
Travel costs and maintenance 80
Car insurance
Car tax
Telephone 50
Cigarettes 60
Newspapers
Personal 100
Other (please state)
Total Expenditure £800

[15]

So
£850 income
Minus
£800 monthly spending
leaves Jim . . .

Income minus expenditure = £50

£50 is left at the end of each month.

[16]

Budgeting results 1

Putting everything on paper has shown Jim that his financial situation is OK, perhaps a bit better than he realised. He’s not overspending and still has something left over at the end of each month which he could put into a savings account.

He can also see certain things which he could reduce, such as how much he spends on clothes, mobile phone and cigarettes – all non-essential spending.

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Budgeting results 2

His spending is reduced partly because his utility bills are included in the rent. If he is thinking about moving to another flat he would probably have to allow for more expenses such as bills and council tax.

He is also thinking about buying a car which would take the money he presently spends on fares. He would have to look into how much it would cost to buy and run a car.

If he wants to move and buy a car at the same time he will have to budget carefully beforehand to avoid getting into difficulties.

If he sticks to the same pattern of earning and spending he will be able to make plans for the future with more confidence.

[18]

Budgeting techniques

This simple technique can help you keep control of your money. Many people are surprised by how much they spend on certain things because they have never added them up before. This can lead to making changes and economising.

Once you know what your disposable income is you can make plans for the future based on a proper understanding of what you can afford and how you can use that money.

However, there is one crucial ingredient: willpower.

Once you have worked out your budget and how you want to use your money – you have to stick to it.

Otherwise the whole calculation starts again.

[19]

Calculations

It is important to do your calculations on the same time period, ie weekly or monthly.

To convert weekly figures to monthly multiply by 52 to give the annual total and then divide by 12 to give a monthly total.

For example:

Rent is £100 a week

£100 x 52 weeks = £5,200 a year

£5,200 ¸ 12 = £433.33 a month

[20]

Converting monthly figures to weekly

To convert monthly figures to weekly multiply by 12 to give a yearly amount and then divide by 52 to give a weekly amount.

For example:

Rent is £500 a month

£500 x 12 = £6,000 a year

£6,000 ¸ 52 = £115.38 a week

[21]

Tips for budgeting

• Allow time to work out your income and expenditure each month.

• Use your bank statement to check all essential spending.

• Keep a record of your spending and review it once a month.

• Keep receipts wherever possible.

• Set up standing orders or direct debits for rent, telephone, utilities bills and other regular payments. This can help you budget and make sure you don’t forget to pay bills on time.

• Set aside an amount each month for savings if you can and include this in your expenditure calculation.

• Think ahead for any future expenses you can predict such as birthdays, Christmas and start of term. Plan your saving toward these dates.

• Be aware of your present financial situation – how much your current balance is and how much you owe. Avoiding the subject will only make it worse!

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Get help with budgeting

• If you feel you are getting into debt seek advice as soon as possible.

• Consult a student welfare adviser at your college or university or visit your local Citizens Advice Bureau. They will help you get control of your finances and help deal with any priority debts.

• Before deciding to borrow money check to make sure you are getting the best deals. Check out any interest free offers first. Compare interest rates and aim for the lowest APR. Don’t forget the cost of payment protection insurance if included.

• If you are a student open a student or graduate bank account if you haven't already got one.

• Visit the cashpoint as rarely as possible. Try withdrawing money for a week and sticking to your spending plan.

• Spend carefully. Compare prices for the same items in different shops to find the best deal. Why pay more for the same thing? Consider buying second-hand goods if available. Visit your local charity shops for a bargain!

• Find out if you are entitled to any discounts and take advantage of them.

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Activity 1: How much does it cost?

This exercise is designed to give you an idea of how much things actually cost and the possible variations in price and quality.

• Attached is a list of items for which you have to find a cost.

• For each item you must provide a source of evidence to support your finding.

• Evidence could be a clipping from a newspaper or magazine or a receipt.

• Also a note of the source of your information is acceptable, eg compact disc – WH Smith £9.99.

Possible sources of information include:

• visits to local shops
• local newspapers and publications
• friends and family
• personal experience
• catalogues
• the internet.

Your research is done as homework followed by a reporting back session in class.

You can discuss your findings and consider:

• what you think is a reasonable price for an item
• what you think is a waste of money
• what difference does quality make to your spending
• anything that surprised you – either cheaper or more expensive than you expected.

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How much do things cost?

Housing: for each consider (a) a one bedroom flat, (b) a three-bedroom house
1 Rent
2 Mortgage
3 Council tax
4 Insurance: buildings or contents
5 Water and sewerage rates
6 Electricity
7 Gas
8 Phone

Food: enough for 4 people
1 Weekly shopping
2 A takeaway meal
3 A restaurant meal
4 A round of drinks

Cars
1 Car tax – annual amount
2 Petrol – weekly
3 Insurance – annual amount
4 MOT
5 Repairs
6 Servicing
7 Parking

Travel: from home to school or college and return
1 Bus fare
2 Taxi
3 Train ticket

Entertainment
1 Concert tickets
2 Tickets for a play
3 Cinema tickets
4 A CD
5 A DVD
6 A video game
7 A night out with friends

Household goods
1 A TV and DVD player
2 A hi-fi music system
3 A three-piece suite
4 A dining table and chairs
5 A bed

[25]

Activity 2: Budgeting case studies

For each of the following examples complete an income and expenditure sheet and work out the person’s disposable income. You can use either the income and expenditure calculation sheet or spreadsheet.

1 A single man living alone in a rented flat. He works 37 hours a week and earns £900 a month. His monthly expenses are:

Rent £200
Prescriptions £20
Council tax £100
Clothes £30
Water rates £10
TV licence £10
Sewerage rates £10
Travel £50
Food/Household items £170
Telephone £40
Electricity £20
Newspapers £10
Gas £20

2 A husband and wife and two children under 16. He lost his job through ill health and his wife looks after him and the children. They receive £598 income support, £564 child tax credit and £164 child benefit each month. Rent and council tax are paid by benefits.

They have the following monthly expenses:

Water rates £15
Sewerage £11
Food/Household items £785
Electricity £60
Gas £60
Home insurance £15
Health costs £30
Clothes £130
Pets £25
TV licence £10
Travel £75
Car insurance £15
Breakdown cover £10
Car tax £15
Telephone £30
Newspapers £10
Nappies £30

3 A single man lives with his son and was recently made redundant. He is receiving job seeker’s allowance of £240 a month. His monthly expenses are:

Rent £120
Food/Household £50
Health £5
Clothes £5
Travel £30
Telephone £20
Newspapers £10

4 A single woman earning £1,040 per month. Expenses:

Rent £433.33
Food/Household £45
Prescriptions £10
Clothes £20
Travel £150
Car insurance £34.66
Car tax £9.58
Telephone £20
Newspapers £7.50
Hire purchase (car) £ 171.87

Are there any areas where you think economies could be made to non-essential spending?

Budgeting
End