Essential spending
Spending you have to make to cover basic living and your commitments.
Essential spending is the money you have to pay out just to live: somewhere to stay, heat and light, food, getting about, and any debts. It comes round like clockwork and has first call on your income. What is left after the essentials is what you actually get to choose how to spend.
The money you cannot avoid
Essential spending pays for the things you genuinely need for day-to-day living, and for commitments you have already taken on. Unlike treats, it does not really go away, and it usually arrives at regular intervals: some weekly, some monthly, some quarterly, some once a year.
Because it comes first, essential spending is the base of any budget. Everything else has to fit around it.
Where it goes
The main areas are much the same for everyone. Housing is usually the biggest: rent if you rent, or mortgage payments if you are buying. A mortgage is a long-term loan secured against the home it pays for. On top of housing come council tax and utilities, which means gas, electricity, water and broadband.
Then there is food, and getting around, whether that is public transport or the cost of running a car: fuel, insurance, servicing, the MOT and vehicle tax. Finally, any debt repayments you owe, such as a loan or a credit card, are essential too, because missing them causes real problems.
The rules that come with a car and a home
Some essentials are not just sensible, they are the law. A car used on public roads must normally be insured and taxed, and most cars need an annual MOT once they are three years old, to check they are roadworthy.
Council tax pays for local services like bins, roads and libraries. How much you pay depends on the property's valuation band, the charge your local council sets, and any discounts or exemptions you qualify for, such as the discount for living alone.
VAT, the tax hidden in prices
You also pay tax when you spend. VAT, value added tax, is added to the price of many goods and services, so it is built into what you pay at the till rather than arriving as a separate bill. Different things are charged at different VAT rates, and some essentials are charged nothing at all.
When the essentials go up
The trouble with essential spending is that you cannot easily cut it. If rent, energy or food rises, you still have to pay, so there is less left over for saving and for the things you enjoy. When that happens, people have to trim elsewhere or, in a tight spot, borrow, which is why keeping an eye on your essentials matters.
Example monthly essential spending
Illustrative only. Real amounts vary a lot between people, homes and parts of the country.
- Rent £725, groceries £320, council tax £95, gas, electric, water and broadband £185, public transport £92, a debt repayment £60.
- That totals about £1,477 a month, before anything is spent on treats or put into savings.
- If any one of these rises, say energy over winter, the total climbs and there is less room for everything else.
- 'An example budget is the typical budget.' Figures like these are only an illustration. What you actually pay depends on where you live, whether you rent or own, and how many people share the costs.
- 'Debt repayments are optional when money is tight.' They are an essential. Missing them adds charges and damages your ability to borrow in future.
- 'Council tax just depends on the size of the house.' It depends on the property's valuation band, your council's charge and any discounts, not simply on how big the place is.
Key terms
- Essential spending
- Money you have to spend on basic living and existing commitments.
- Mortgage
- A long-term loan secured against a property.
- Council tax
- A local tax that funds local services, based on the property's valuation band.
- VAT
- Value added tax, added to the price of many goods and services.
- MOT
- The yearly test that checks a car is roadworthy.
Not examined
Check your understanding
- Give three examples of essential spending.
- Which motoring costs are a legal requirement to drive on public roads?
- What happens to the money you can save when your essential spending rises?
Show suggested answers
- Any three of: rent or mortgage, council tax, utilities, food, transport, debt repayments.
- Insurance and vehicle tax, plus a valid MOT once the car is three years old.
- There is less of it, so you may have to cut back on other things or, in a tight spot, borrow.