“Knowledge is power. If you know what is going on with your finances then you can make better decisions about your finances.”
If you’ve ever bought something and then struggled to pay a bill at the end of the month then budgeting could help stop that happening again.
How to work out a budget
Income and outgoings
Your finances are like a see-saw. On one side is income, which is the money that you earn and any benefits that you get. On the other side are your outgoings which is the money that you spend. There are two types of outgoings: essential bills and disposable income. You want the see-saw to balance. You don’t want it out of balance with more money going out than you have coming in.
Essential bills vs. disposable income
Essential bills include your housing costs (rent) , council tax, utility bills for electricity, water and gas, your broadband bill if you have the internet at home, and your phone bill. Most of these are fixed and regular, and you need to pay these on time. The money that you spend on food is also an essential bill because you have to eat. Food can be a big expense but isn’t fixed and there are things that you can do to spend less on food.
Disposable income is what’s left over when you’ve paid or put money aside for all of your essential bills. It’s what’s left for you to spend on what Iona calls “fun stuff” – the things that matter to you or make you feel good. That might be a night out, a trip to the cinema or you might save it up for a holiday. That sort of thing. The important thing is that your spending on the fun stuff doesn’t get in the way of your essential bills. If you get behind or don’t pay essential bills like your rent then you risk getting evicted or getting a bad credit rating.
“The really important thing to remember about your bills is that you have to pay them, no matter what.”
What is a credit rating?
A credit rating or credit score is a number used by financial companies like banks and money lenders to decide whether you can access certain products and get good deals. You credit score changes over time and is mostly decided by how good you are at borrowing money and then paying it back on time. The banks decide your credit score and it’s difficult for you to change it quickly. We cover the different types of debt and your credit score in more detail in our article about debt. Most essential bills that you have to pay, like your electric bill or your phone bill, will count towards your credit score. If you have a good credit score then companies will be happy to let you borrow more money (perhaps a car loan or something like that). If you have a bad credit rating then you might have credit refused so it can be hard to get things like a phone contract when you want to pay monthly instead of being on pay-as-you-go.
Tips to keep on top of your budget
It depends on which way of budgeting works best for you. If you have a smart phone and are comfortable using it then there are lots of apps and shortcuts that you can use to manage your money. If you bank online then your bank will have an app that you can download that will help you to manage your money. It will link with your debit card. If you buy your food shopping from a supermarket, the app can recognise that and it will class it as food costs in your budget. It will recognise other bills, or you can set them in the app, and it will help you to recognise and track where your money is going and how much you have left over each week or month.
You can also download budgeting apps that will also link up to your bank account. They can look at what you’re spending and categorise them too.
You can also download budget templates online, use a spreadsheet like Google sheets or Excel if you have access to a computer.
The simplest way is to use a pen and paper, make a column for money in (wages and benefits) and money spent (essential bills). Take the money spent away from the money in and whatever’s left is your disposable income for fun or savings.
Find out what works for you, and stick with it. If what you’re doing isn’t working for you then try one of the other ways of budgeting. When you find a way that you’re comfortable with you’ll stick with it and will get in the habit of managing your money.