How to budget
Building a personal budget, and handling a surplus or shortfall.
Making a budget is basic arithmetic: add up the money coming in, add up the money going out, and compare the two. If money is left, you have a surplus to save. If you are short, you have a shortfall to fix, by trimming spending or bringing in more. Do it once and you always know where you stand.
Income minus outgoings
A personal budget estimates two things: the money coming in, your income, and the money going out, your outgoings. To make one, you need to know your regular income and to list all your costs, the big obvious ones and the small easily-forgotten ones.
Then you compare. Income minus outgoings tells you whether you have money spare or are heading into the red.
Surplus or shortfall
If your income is more than your outgoings, you have a surplus, an underspend. That is the good position, and the question becomes what to do with the spare money, usually save some of it.
If your outgoings are more than your income, you have a shortfall, an overspend. That needs fixing, and there are only two levers: cut some costs, or increase your income. A budget shows you a shortfall early, while you can still do something about it.
A simple budget
Illustrative figures, to show the arithmetic.
- Income (money in): £1,200 a month.
- Outgoings (money out): rent £600, food £180, transport £90, phone £30, savings £100, other £150, which is £1,150.
- £1,200 minus £1,150 is a £50 surplus (an underspend), which can be saved.
- If outgoings were £1,300 instead, that would be a £100 shortfall (an overspend) to solve by trimming costs or earning more.
- 'A budget is just for bills.' A good budget includes everything, including saving and the small everyday spending, or the numbers will not add up honestly.
- 'If I overspend one month I have failed.' A shortfall is information, not failure. It tells you to adjust, by cutting a cost or earning more, before it becomes a habit.
- 'A surplus should just be spent.' A surplus is your chance to save or clear debt. Letting it drift away is a missed opportunity.
Key terms
- Income
- The money coming in.
- Outgoings
- The money going out.
- Overspend
- Spending more than you have coming in.
- Underspend
- Having money left over after spending.
Check your understanding
- What is the difference between an overspend and an underspend?
- You have £1,200 coming in and £1,150 going out. What is the result?
- Name two ways to deal with an overspend.
Show suggested answers
- An overspend is when outgoings are more than income; an underspend is when income is more than outgoings.
- A £50 surplus, an underspend, which could be saved.
- Cut some costs, or increase your income.