Household Budgeting to Beat Debt
In these straitened times it is dangerous to ignore debt. Just like any personal, domestic, social, relationship, marital or business problem, the first and best thing to do is to face up to the issue.
If you don’t know what the problem is, how can you fix it? Here is a simple approach.
We understand income. It’s simply money coming in, both earned and unearned. Wages, salary, pension, child benefit, tax credits, dividends, interest on deposit accounts are all forms of income. We also understand expenditure. It’s simply money going out or what we spend. Some spending is done by cash, some by store, credit or debit card, some by cheque, some by standing order mandate, some by direct debit mandate and some by credit transfer.
Put the two words ‘Income’ and ‘Expenditure’ together however and many of us scratch our heads and think of ‘boring’ accountancy or bookkeeping, even in these days when education is so widely available. An Income & Expenditure Statement (I&E Statement) can be a scary concept for some but if you boil it down to its simplest form, all it just a summary of your income in a given period of time (usually a month) and what you spend in the same period.
The first step in compiling an I&E Statement is to list our income items for one month and the amount of each one and to then tot them up.
The second step is to list our expense items for the same month and the amount of each one and to tot them up as well. Now we have two monetary amounts. The third step is to subtract one total from the other. Assuming that the total income exceeds the total expenditure, the amount of the difference is Disposable Income (DI). DI is really the amount of money available to us to do as we please with it. We can exercise discretion or we can spend it foolishly. We could pay off some of the bills which we ran up in the past or we can save it. Alternatively we could do some additional spending on goods or services, or on socializing or going on holiday or even give some of it away as gifts to our children, family or friends.
Of course for people who are in a relationship, with or without children, compiling an I&E Statement can be a little bit more complex. Still, as long as one includes all sources of income and all items of expenditure for oneself, one’s partner and one’s dependent children who are in residence, it can still be a simple task. One ends up with a family I&E Statement. The main other matter that may complicate compilation of an I&E Statement is how to deal with certain items of expenditure which fall to be paid annually and not every month, such as car insurance. The solution is to calculate the average monthly amount you need to put aside so that you can pay these annual expenses when they fall due.
What happens when expenditure exceeds income and you have negative DI? Now you are living beyond your means. You are spending more than your income. If the month for which you compiled your I&E Statement is typical of the year as a whole, then you must take steps to address the overspend. Otherwise you will get into debt which will get bigger as each month passes. If this has been going on for a while you may already be seriously in debt. What can you do?
A good start is look at ways of cutting back on your spending and then following through with actual cutbacks. This is often easier said than done. You could look at smoking, drinking, socializing and holiday expenditure. You could look at the cost of utilities and switch to cheaper providers of electricity, gas, telephone and mobile phones.
You could look at ways to increase income. Could you take in a paying lodger or two? Can you or your partner or spouse take on a second or part-time job? Do any adult children who may be residing with you contribute their fair share to the family budget? Do you get all the state or council benefits to which you are entitled? What about your entitlements to tax credits and housing benefit? Can you downsize your vehicle to a more economical one, one that is easier to run? Can you do without a car altogether and use public transport and the occasional taxi?
We call all these considerations and the follow-up actions ‘budgeting’. The important thing is the follow up action. The best plan in the world is useless without implementation. If you find the budgeting and implementation process too difficult, perhaps you should seek advice. If you are already encountering difficulties paying your debts you may be insolvent. If you want to determine this one way or the other, do consider going to CCCS, CAB or to any reputable commercial provider of insolvency services and obtaining professional advice. You will get free initial advice and assistance in compiling your I&E Statement and you will be able to establish for sure if you are insolvent or not.
Any reputable Insolvency Practitioner (IP) will determine if you are insolvent. If you are, you can explore and have explained to you the various possible solutions to your predicament. All available options will be explained. Such options could include Bankruptcy, an Individual Voluntary Arrangement, a Debt Management Plan, a Debt Relief Order, an Administration Order, Debt Consolidation or some other financial solution. You can make up your mind if you want to proceed further. You commit to nothing at this point and can walk away and try to sort out your own finances.