What is a budget?

A budget is an itemised summary of your income and expenses for a given period. It helps you plan your spending, manage your money and set financial goals.

A personal budget is an essential tool to help you tackle debt problems. This will help you work out how much you have coming in and what you are spending. You can then see how much you have leftover to pay off your debts.

You can start to record this information on the personal budget sheet.

Why should you do a personal budget?

Working out a personal budget is essential because it helps you:

• see how much money is coming into your household

• see how much money is going out

• see how much money you have left

• work out affordable offers to creditors

• plan your future spending

Making a start.

The first thing you'll need to do is gather together all of your financial information, including:

• Your mortgage or rent payment

• Your regular household bills (council tax, water, gas, electricity, phone, internet)

• Your living costs (food, toiletries, prescriptions, clothing)

• Child care costs

• Any insurance policies you have (home insurance, pet cover)

• Your travel expenses (car costs, bus fares)

• Your leisure costs (gym membership, cinema trips)

• Any debts you have (loans, credit cards)

Keeping a spending diary

Going through your bank statements can be a really useful way of taking stock of what you are spending. You'll have an easy job of keeping track of things like your household bills or petrol costs - as these will be usually itemised (although remember to disregard the cost of that coffee when you see an entry next to the petrol station). 

However, when thinking about your everyday expenses (food, milk, toiletries etc.), you might find it more challenging to work out what you've spent. Most budgets will describe this as "household" expenses - essentially, it's an aggregation of everything else that's not listed elsewhere in the budget. It's also the place where most people could make significant savings. For example, you might do a weekly shop at a major supermarket and think you are paying attention to getting the best deals there, but what about everything else? Pop-out during your lunch break? Buy a sandwich and a drink? No problem with that - but what about the magazine you picked up or the scratch card? There's nothing wrong with these items of expenditure if you can afford them, but if you go back to why people keep budgets in the first place - to help them deal with their debts or save for something big - either of these will be easier if you can keep a close eye on each item of expenditure. 

Keeping a spending diary, a small notebook or even apps that can help is a good way of knowing what's going out and what and allowing you to make changes if you want to. 

Online, spreadsheet or pen and paper?

There are tons of tools to help you put together a budget. You might prefer to use a spreadsheet if you know how to, or you could rely upon pen and paper (but probably also a calculator!). Unfortunately, any of these approaches suffer from the rule of "Garbage in Garbage out" - meaning if you get the numbers you use to build up your budget in the first place wrong, the conclusions you draw will be wrong too. 

Using a spreadsheet or pen and paper enables you to see what's going on at a glance - and testing some of the assumptions you might have made, but you'll need to be reasonably confident with your numbers to do this. Many of the online tools available are useful; they help people budget even when they hate maths!

Some initial considerations

A budget has to be over a set period - usually one calendar month - and all items of income and expenditure need to be converted to the same period. So, if you pay for child care every week, this needs to be multiplied up to work out the monthly equivalent. It is imperative to remember that there are not four weeks in a month. If there were, then there would be only 48 weeks in a year (4 weeks X 12 months), and where have those missing weeks gone?

Here are other examples:

You pay your electricity and gas quarterly. As these bills vary from quarter to quarter, you can either choose an average over the year (based on your usage) or recalculate your budget for the winter and summer months. Your annual bill must be divided by 12 to arrive at a monthly figure, but your quarterly bill must be divided by 3 - as there are three months in each quarter.

You may generally find it easier to account for your household expenses (food, toiletries etc.) weekly. To arrive at a monthly average - you need to multiply the weekly amount by 52 (the number of weeks in the year) and divide this figure by 12. Although dividing by 4.333 gives you very close to the same figure.

Working out(and maximise) your income.

Add up the income for you and your household. Include the following:

• Wages and salary after deductions (normal take-home pay). Only include overtime if it's regular. Check with your local tax office that you have the correct tax code.

• Benefits. Some benefits are paid fortnightly, some every four weeks and some per calendar month - for example, Universal Credit should be paid monthly.

• Contributions from other people who live in your home, such as grown-up children and elderly relatives (known as non-dependants).

And what better time than to carry out a full check to see if you are entitled to additional benefits. Again, tools like the income maximisation tool from turn2us will immediately indicate if you are missing out. 

Your outgoings

• Housekeeping. This should include food, toiletries, cleaning materials, newspapers, and a small amount for entertainment and other spending. A rough guide would be as follows.

• Work out with your family how much money you have to spend each week on basic living expenses. Don't include any debts or arrears, or credit payments at this stage.

• Mortgage. You will usually pay it monthly. To get a weekly figure, multiply the amount by 12 and divide it by 52.

• Rent. Check whether you are entitled to any Housing Benefit (rent rebate).

• Council Tax. Check whether you are entitled to Council Tax Benefit. You usually pay Council Tax in 10 monthly instalments, but some councils will accept payments every week or two weeks. If you live alone, you will be entitled to 25% off your instalments.

• Water rates. Most water companies will accept payments every month, week, or two weeks. It is vital to keep up with your ongoing water rates bills.

• Gas and electricity. Work out the cost of your last four bills. Divide this by 52 if you are preparing a weekly budget or 12 if monthly. Gas and electricity cost less if you pay by monthly direct debit from a bank account. If your heating bills are very high, ask about the Home Energy Efficiency Scheme (HEES). Some fuel companies help with cheap fridge freezers or light bulbs. Check with your supplier.

• Other amounts and emergencies. This should include irregular outgoings like birthdays and Christmas, house repairs and maintenance, and a 'cushion' against emergencies.

• Either build it into the housekeeping figure or list it as a separate item on your budget. Be prepared to explain this figure to your creditors, who may question it, if it is quite high.

• TV licence. Allow £3 a week for a colour licence (£12 a month) and £1 a week (£4 a month) for black and white.

• Magistrates' court fines. These are a priority, and you should include them in your essential outgoings. They are different from county court judgments.

• Maintenance. Include voluntary payments and any payments ordered by the court or Child Support Agency.

• Travelling expenses. These should include travelling to work, school and shopping. If you are running a car, including tax, insurance, repairs, MOT and servicing, and petrol.

• Hire-purchase. If you need a car for work or mobility reasons (and you have bought the car using a hire-purchase type arrangement), you will need to include these payments in your regular 'outgoings', or you may lose the car.

• School meals. Check to see if you are entitled to Universal Credit or Pension Credit. If so, you can claim free school meals. 

• Prescriptions, dental treatment and sight tests or glasses. The rules are different depending on whether you live in England or Wales. Prescriptions are free in Wales for everyone. If you live in England, you may have to pay.

• Health costs. Make sure you include any extra costs because of an illness or disability. This might be due to a special diet, extra clothing, bedding, special equipment, help in the home or additional costs, and prescriptions.

• Clothing. As a rough guide, allow £3 to £5 for each person each week. Don't forget the costs of school uniforms. Only include non-dependants if you pay for their clothing.

• Phone. Only include your ongoing bill.

It's your budget. Your household's outgoings may be different from our guidelines. For example, you may have extra expenses because of your circumstances, such as a special diet, additional transport costs due to a disability or living in a rural community, the cost of a uniform for work, or regular payments you have to make of your religion.

It is your budget, so the figures should be your own. Be careful! If you don't consider extra expenses (or if your figures are much below our guidelines), you may find it more difficult to stick to any long-term repayment plan. This could lead you to more significant difficulties.

One-off expenses

One of the aims of creating a budget is to plan your spending thoroughly. For example, do you need to pay for a considerable one-off expense later in the year, such as a car MOT or a repair to your home? Make sure you add this to your budget.

You can do this by taking the amount you'll need for the one-off expense, dividing it by 12 and adding it to your monthly budget. You then put this amount aside every month. Putting it in a savings account away from your day-to-day bank account can help you avoid dipping into it.

 'Surplus' or 'deficit' budget?

Have you got money left over once you have added it with your monthly income and taken away your outgoings?

If you do, this is called a 'surplus'. You should use this to pay towards any debts you might have or add this to a savings account. 

However, if you're spending more than your total income each month, you have a 'deficit' budget.

Spending more than you have coming in means that you're at risk of getting into financial difficulties, especially if you're using credit to pay for everyday living costs or regularly dipping into your overdraft.

You may want to consider revisiting your budget to see if you can cut back in any areas. In addition, you should seriously consider getting debt advice – using overdrafts and credit cards in this way is a dangerous sign of debt, and maybe it's time to take structured, professional advice to give you the guidance you need. Our advice finder tool will help you work out who to ask. 

Save as you mean to go on.

Our article on saving money on your outcomes will give you all the information you need to cut back on those costs. 

Review and adjust

Once you've started to budget effectively, you should review your spending regularly. There's no set time to do this. However, suppose you are using your budget as a basis for a financial stamen to negotiate with creditors (see our item on dealing with debt). In that case, this will generally be expected every six months. However, even if this is not the case, it's worth reviewing and adjusting your budget:

• If any of your costs have increased or decreased

• If any of your benefits entitlements have changed

• Your budget matches what you're spending (and this is why the spending diary is so handy)

• If you've planned to build up any savings or pay off any debts, are you on target