How to Budget Part I: Budgeting on a Low Income

Leaving home is a massive step for anyone. Leaving it without a clear idea on how to manage your money, though, is frightening in the extreme. With no grown-ups around to do the little things, it can quickly become overwhelming.

And it’s not just those first months away from home that can be hard. Budgeting when you first get a family, or when you find yourself unexpectedly between jobs, or even just when you first leave school and are looking to save a bit before moving out – it’s all hard!

Let’s help make it easier.

The first step to saving money and budgeting

Money management is a skill. It’s not something you are born with, and some people are better at it than others, but everyone can learn and benefit.

The first step is simple: don’t be frightened.

Worrying about finances is one of the largest problems for mental health in the UK today and being frightened of the consequences of having little or no money can make even the strongest of us break into tears. Remember that there is always an answer, and that money is not something to be frightened of.

Communication is the most important thing

There is nothing more important than communication when managing money, budgets and debts. If you hide things, keep anything secret or stick your head in the sand and hope it’ll all go away then things will go wrong. Be open with the people you are financially tied to, be honest with your creditors and above all, tell the right people as soon as something starts to become difficult.

It’s amazing how much help you will get if you just ask! Even the most frightening institution (like HMRC) will listen to you if you have difficulties and they will do what they can to arrange a payment plan to suit you. At the end of the day, they want their money back and they’re not going to get it if you slide into bankruptcy or try to run away.

Remember the golden rule: communicate.

Understanding your income and outgoings – making a budget planner

You cannot possibly try to manage your money if you do not know what money you have and how much you spend. Whether you use one of the money management tools out there – on apps, as part of your banking etc., or just simply have a notebook where you note down regular payments, you need to know how much money you have.

How to do a budget plan

Write down:

• All the money you have coming in and the dates that it comes in

• All the regular bills and the dates they go out

That’s the first step. As soon as you do this you should have an idea of your left over (spare) money after bills. Don’t put in things like food or clothes; they come later. This first stage is about understanding the automatic income and outcome that will happen if you fall asleep for a month or two and didn’t touch your bank account.

You’ve just taken the first steps to controlling your finances with a monthly budget.

If your outgoings are greater than your income (or so close as to make you worry), then you only have two choices:

• Get more income

• Have less outgoings

This isn’t rocket science! Though this obvious conclusion is of no surprise to anyone, it is incredible the number of people who have outgoings that exceed their income. If you can’t raise your income (and who hasn’t tried already), then you are going to have to cut back on outgoings.

Cutting back on spending – how to spend less money with automatic payments

You believe it is all essential. It isn’t.

You believe it is all set in stone. It isn’t.

The first thing to do at this stage is to see what can be removed or cut back. Remember, nothing is as essential as you think. Here are some standard regular bills that can be easily cut back on:

• Entertainment subscriptions - Netflix, Amazon Prime, Apple Music, Spotify, Audible, Xbox Live. We live in a subscription-based society where signing up to services is the norm and having entertainment at your fingertips is just part of daily life. The truth is, though, if you can’t afford it, these things should go. Entertainment is completely non-essential (yes, even Netflix!). If you can drop it at this stage, then do.

• Other subscriptions – the gym, wine club, organic vegetable deliveries, Graze, the Hotel Chocolate Tasters Club. Oh, we know about all these too, and they can all go. Obviously, you will have an order of priority, but like pure entertainment subscriptions, these little perks are not needed when making a strong budget.

• Charity payments – this may be hard to swallow for some, but if you are struggling to make ends meet yourself, giving away money is not the best idea. Take a break from your charity payments and go back to them when you are firmly in the black.

The next stage is to see what more significant outgoings can be renegotiated, reassessed and generally made smaller. This group is typically things that you might need to keep but may be able to opt for a lesser version of:

• Mobile phone contracts – lower your data allowance, get rid of extra devices, cut out hotspots or roaming extras and if you are close to an upgrade period, don’t upgrade – keep your current phone and go sim-only for massive savings.

• Insurance – any extra insurance you don’t need (like washing machine repair, mobile phone insurance, bicycle insurance, pet insurance) you may be able to cut or lower. Other insurances can be renegotiated. Spend some time shopping around to see if you can make improvements to car insurance, life insurance, home insurance and more. At Compare UK Quotes, we don’t ever suggest you cancel major insurance outright (like life insurance) but call your providers and see if you can take a payment holiday or renegotiate payments. Remember the golden rule: communication.

• Bills – it’s worth calling broadband providers, electricity and gas companies etc. and seeing what offers they can give you. Again, communication is key and may flag up savings you didn’t even know were possible. If you tell a provider you are planning on leaving them for another, it’s often impressive how quickly they can find you an offer!

• Debt payments – credit card bills, bank loans, car finance, overdraft interest etc. These are usually the last things to mess with as regular payments, as arranged are important for your credit rating, making sure you don’t pay too much in interest and more. They can be refinanced, however, and if you need to you could consider a debt consolidation loan. See our articles on loans for more advice on this subject. Again, you can contact the finance companies and see if you can make a different payment amount to better suit your current situation.

Rearranging bills

This trick could save you tens of pounds in bounced direct debit charges and other similar fees. Take a look at the dates of your direct debits and see if you can rearrange them to better suit your income dates.

Often over time, things may have become a little bit skewed, like a mobile phone payment that always comes out two days before payday and has a knock-on effect of sometimes bouncing and causing charges, or two bills which come out within 24 hours of each other than at the same time eat all the money for that week but would be easy to handle if split apart.

Managing cashflow is as important as managing the actual numbers and will not only save you money, but also helps the weeks feel less stressful, without big bursts of difficult outgoings one week followed by a ‘good week’ two weeks later.

How do I stop spending money? – calculating your general expenditure

We all spend too much money - it’s a fact! You pop in the petrol station and get a drink (and some gum, and that bar of chocolate), or you go to the supermarket for a loaf of bread and some milk and come out with a nice top that was on sale, a magazine and some shampoo but forget the bread.

Again, the trick here is to write it down. If you are on a tight budget, then getting things at notice is a no-no. A single misstep which leads to a takeaway pizza rather than the sausages you planned can throw havoc with your finances, especially when you throw the sausages away two days later because you forgot to cook them and now, they’re off.

Plan your meals, work out your shopping list and stick to it. Other monthly expenses you should track and add up include:

• Fuel costs

• Other travel expenses (bus tickets, trains etc.)

• Clothing costs

• Toiletries

• Irregular entertainment (cinema etc.)

• Any other personal regular outgoings

Like you did with the regular bills, add this all up and see if the spare money (income minus bills) has enough in it to cover.

And just like the regular bills, if the money isn’t there to pay for these, then something has to go. Lose the entertainment first, try to stretch clothing next, or go back to the earlier list and do what you can to free up money there.

Do not pass on to the next section until your outgoings no longer exceed your income.

Willpower – how to budget your money and then stick to it!

Of course, this is all very good in theory, but once you get into the real world, how do you manage the budget? Is willpower enough?

There are a few methods that can help:

Make it a game

This works for many people. By assigning yourself points or a small reward if you manage to keep to your budget each week, you make the whole difficult task a little more fun, and over time it can be addictively entertaining.

Have a goal

Promise yourself something big if you stick to the budget for six months – a holiday somewhere you’ve always wanted to go, or a new television. It shouldn’t be a ridiculous goal that’s out of reach, but something genuinely achievable.

Always refer to the notes

Keep an eye on your budget plan all the time. Check it each morning and each evening. By keeping it in mind you can’t ‘accidentally forget’.

Don’t do it alone

Communicate! Having a spouse who is helping with your budget, or a friend willing to do the same thing for themselves, can help motivate you in many ways. Even just calling a parent every few days and letting them know you are on target can be a great benefit.

More budgeting skills!

Look to part two in this series to learn how much of your income should go to bills, how to save money on a tight budget, how to make your money work for you and more. We’ll even be taking a look at some of the best budgeting apps available in the UK a little later on.

Good luck! For more budgeting and financial advice, take a look at our extensive library of articles on the subject.

Read Part II here!