How to create your income and expenditure budget
On the road to financial rehabilitation creating a budget should be at the very start. Yet most people seem to forgo such a simple but most important task with disastrous consequences. The budget is the most effective way of giving you a clear and complete picture of your finances. It is simply a list of all your income (including benefits) and all your outgoings, placed side by side so that you can see what comes in and what comes out. It is only by having the full picture of your finances that you can see the shortcomings, so that you can attempt to relieve yourself from debt and stay out of trouble in the future.
The number one rule in creating a budget is this: be honest. A budget must be brutally accurate so make sure you have the correct figures for all your income and all your expenditure. Don’t skip anything. Include even the smallest item, however insignificant you think may be. Here are the basic steps you need to follow in order to create a meaningful and effective budget:
Step 1. List all your income.
The very first thing you need to do is put together a list of all your income for an average month. You may start with you salary from your employment, pension if you are retired or main benefit if you are not working. Don’t forget your overtime from work, child benefit and rental income from tenants you may have living in your house or house keep money from your older children. As long as it is regular income paid to you every month, it needs to be added to the list. However, do not list irregular income. If you made some money one month because you sold something on Ebay or you did some overtime at work on the odd occasion do not include it in the list of regular income. It is a bonus, not an income you can rely on.
Step 2. List all your expenditure.
Listing your expenditure can be a difficult task but it is important that you persevere. Start with your housing costs, rent or mortgage and council tax. List all your loans and credit cards. Then the utilities, electric, gas water. How much do you spend on the car including fuel, road tax, insurance and repairs. Do you pay maintenance to a former partner? Then communications and entertainment, such as telephones (landline and mobiles) and TV subscription. Most of these expenses should be the same every month so it is easy to obtain. Then go on to food and clothing expenditure. Finally add every other expenditure you can think of. Don’t forget items paid once a year such as the family holiday. Such annual expenditure needs to be divided by twelve so it can be added to the monthly expenditure. Finally, think long and hard of any other regular expenditure you may have. Do you have a night out once week? It needs to be calculated monthly and added to your monthly expenditure.
Step 3. Compare the two lists.
When you are sure that all the income and all your outgoings have been added work out the totals. Are you left with considerable disposable income at the end of the month that you don’t know where it is gone? Go through your expenditure again, you may have missed some items. When you are happy that you have the complete and accurate list, the result should be quite clear. Are you spending too much? Are you spending more than you are earning? If so it is time to proceed to the next step. Examine the individual outgoings and see where savings can be made.
Step 4. Review in detail your expenditure.
At the end of this exercise you may have found that you have a problem, namely that your monthly outgoings are more than your income. What do you do? Go through one by one your expenditure and decide which ones cannot be changed and which ones can. Your monthly mortgage and loan repayments cannot be changed immediately without too much hassle but other expenditure may be easier to reduce. Do you really need the expensive all inclusive TV entertainment package? Can you get a cheaper insurance on the car? Can you reduce your monthly food bill by switching to a budget supermarket? When was the last time you reviewed your utility supplier? Are you spending too much on entertainment? Entertainment is often the easiest item to reduce. We all have certain items of expenditure that we can’t do without but many more that we won't miss. It is all a matter of priority. Be thorough and stick to your plan, if you want to achieve financial stability in the long term.
Step 5. Reduce your finance repayments.
A special effort should be made to review your mortgage, loan and credit card repayments. When was the last time your reviewed your mortgage? Are you still getting the best rate? Perhaps a remortgage would get you a better deal, particularly if you are able to consolidate other debts. The mortgage rate is the cheapest money you can borrow. However, you should keep in mind that if you add other unsecured debts to your mortgage they all become secured and therefore if you are unable to meet your mortgage repayments your home may be at risk. Always seek advice from an Independent Financial Advisor or a specialist mortgage consultant.
If you find that you are in a good rate with your mortgage but at the same time you have other debts, either unsecured loans or a variety of credit cards you could still be saving on the repayments by putting everything together into one unsecured loan and one manageable repayment. Are you a homeowner with available equity? It may be advantageous to consider a secured loan. Are you renting your house or are you living with parents or relatives? An unsecured consolidation loan may be suitable in order to reduce your monthly payments and make it cheaper for you. One word of caution though. Extending the term of your loans may mean that you will be paying more interest in the long run. However, the priority is to reduce your monthly outgoings and this has to be balanced against the possible longer repayment term. If at a later day you find that you do have the money you may decide to clear the loan earlier. Penalties for doing so are either limited or none at all.
In conclusion, the income and expenditure budget is the number one tool to help you on the road to restructuring your finances. It is easy to do but difficult to stick to it. If you do persevere the outcome will be balanced finances and a brighter financial outlook. In addition, your credit status will improve which will make finance available to you at much better interest rates than those offered to you in the past.
Appendix A – Template- Monthly Income and Expenditure Budget
(Please adjust headings to suit your particular circumstances)
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INCOME & EXPENDITURE ACCOUNT |
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INCOME |
£ |
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£ |
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Salary (Mr) |
£ |
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Salary (Mrs) |
£ |
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Child Benefit |
£ |
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Other Benefits |
£ |
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Other Income (Rental, Maintenance) |
£ |
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Total Income |
£ |
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EXPENDITURE |
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Mortgage/Rent |
£ |
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Council Tax |
£ |
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Water Rates |
£ |
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Electricity |
£ |
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Gas |
£ |
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Mobile |
£ |
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Landline Telephone |
£ |
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TV Licence |
£ |
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TV Subscription (Sky TV, etc) |
£ |
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Motor Fuel |
£ |
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Motor Servicing |
£ |
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Motor Insurance & Tax |
£ |
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Food & Housekeeping |
£ |
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Clothing |
£ |
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Sports, Hobbies & Entertainment |
£ |
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Pets |
£ |
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Hairdressing & Beauty |
£ |
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Sundries |
£ |
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Total Expenditure |
£ |
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Total Surplus/Deficit |
£ |