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How to work out your budget
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If you have debts, you'll need to work out if you've got enough money to pay off what you owe.
To do this, you will need to work out how much money you've got coming into your household and how much you need to spend. This is called your budget. Once you've worked out your budget, you'll be able to see how much you've got left over to pay off your debts.
This page tells you how to work out whether you've got any money to pay your debts off.
You can find more information about dealing with debt on other pages of Adviceguide. For other pages which deal with debt on Adviceguide, in England, Wales and Northern Ireland, see Help with debt, and in Scotland, see Help with debt.
If you are worried about how to deal with your debts, there is free, confidential advice available.
Your local Citizens Advice Bureau can give you advice about debt problems. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.
The first thing you need to do to work out your budget is list all the income for your household. Be honest and make sure that the amounts are realistic.
The list of your income should include:
- wages or salaries for your partner and yourself. Put in your net earnings, that is, after deductions. This should be the amount you regularly receive. If the amounts are different each month, average them over three or six months
- pension money you're receiving
- any benefits you're paid, including Child Benefit and tax credits
- maintenance from an ex-partner for you or your children. Include any Child Support from the Child Support Agency
- contributions from other members of your family and any lodgers.
Think about the ways in which you might earn extra money or increase your income. You may be able to claim benefits or tax credits. There's a useful website that lists organisations which give grants to people in need. For example, it lists some charities which give grants to people to help pay their bills or buy essential items. The website address is: www.turn2us.org.uk.
For more information about how to increase your income, see Increasing your income.You can use our online budgeting tool to help you draw up your budget.
Your local Citizens Advice Bureau can help you draw up a budget as well as looking at ways you can increase your income such as claiming benefits and tax credits. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.
The next thing you need to do to work out your budget is list all your expenses. Be honest and make sure that the amounts are realistic. Under expenses, you should include:
- housekeeping. Include realistic amounts for what you spend on food, toiletries, school dinners and meals at work, cleaning materials, cigarettes, sweets, children's pocket money and pet food
- housing costs. This should include mortgage or rent, a second mortgage or secured loan, buildings and contents insurance, service charges and life or endowment insurance cover attached to your mortgage
- council tax
- gas, electricity and water charges
- telephone charges
- travel expenses. Include both public transport and the cost of running a car such as road tax, insurance, and maintenance
- insurance that is not part of your housing costs (see above)
- childcare costs
- TV licence and any TV rental costs
- any other essential expenses, such as medical and dental expenses or support for an elderly relative
- money you should set aside for unexpected events and contingencies. This includes saving for things like the replacement of essential household goods when they break down.
How much you spend on things
When you make a list of your expenses, think about whether you can make any cutbacks. If you can make cutbacks, this will make more money available for you to pay back your debts.
You will use your budget later on to show the people you owe money to (your creditors) what you can afford to pay towards your debts. If a creditor thinks the amount you spend on something is unreasonable, they may question it and ask you to explain why you spend this amount or to prove that you do.
If you're sure the amount you spend on something is reasonable, it's a good idea to include a short explanation in a covering letter to your creditors. This will make it easier for creditors to accept your budget.
The things that creditors most often ask about are:
Telephone costs. You can include an amount for a home phone and a mobile but if everyone in the household has a mobile it can soon add up. Think about whether you need them all and ways to reduce the bills. Maybe you can do without the home phone and just use mobiles.
More than one car. Creditors are likely to object to two cars in your household unless you have a good reason. This could be because someone in your household has mobility needs due to disability or age, or because it’s the only way that two working adults can get to their separate jobs.
Other expenses. Creditors will accept reasonable amounts for other necessary expenses such as repairs and house maintenance, hairdressing and haircuts, cable, satellite and internet, TV, video and other appliance rental, school meals, pocket money and school trips, hobbies and leisure, Christmas and birthdays, vet bills and pet insurance.
If a creditor does question your spending, take another look and see if it’s something you can reduce or do without. But don’t just change it. Otherwise you may not be able to keep to your budget. Ask yourself what would happen if you went without the item or cut it back. If it’s not essential, you may be able to change it. If you can’t, go back to the creditor and explain why you can’t. Ask the creditor to reconsider their position.
For more information about how to cut back on your spending and save money, see How to spend less.
Your local Citizens Advice Bureau can help you draw up a budget as well as looking at ways you can cut back on spending. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.
Once you've listed all your income and expenditure, add up the figures and see if you've got any money to spare to pay back your creditors.
If you've got money to spare, you'll need to work out how you're going to pay off your debts. You will also need to:
- sort out how much money you owe
- work out which debts are the most urgent ones for you to pay off
- deal with the most urgent debts as a matter of priority
- look at your options for dealing with the less urgent debts
- contact your creditors and make arrangements to pay back what you owe.
If you don't have any spare money to pay off your debts, you'll have very limited options for dealing with your debt problem. You'll need to think about these very carefully.
You can find more information on Adviceguide about dealing with your debts, including your options if you don't have enough money to pay off all your debts. In England, Wales and Northern Ireland, see Help with debt. In Scotland, see Help with debt.
You can get more information about how to deal with debt and money on the following Adviceguide pages:
In England, Wales and Northern Ireland
- Borrowing money
- Debt and court action (in England and Wales)
- Mortgage problems (in England and Wales).