Budgeting (AQA Level 3 Mathematical Studies (Core Maths))

Budgeting

What is budgeting?

• Budgeting is an estimation of the monetary incomes and outgoings for a person or business

  • This revision note focuses on personal budgeting

• Budgeting helps to plan and forecast how much money an individual has

• This is useful when trying to save money over time

  • Knowing your monthly income and outgoings will reveal how much you can aim to save each month

  • A budget will help highlight areas that are fixed outgoings, and areas which could be cut back to help save money

• A budget can help individuals be more objective about their finances

  • E.g. They may "feel" they are spending a sensible amount of their earnings on new clothes and shoes

  • But when a budget is created and they see the true amount and proportion of their income, they may feel differently!

Creating a budget

• Below is a simplified version of a current account statement for one month

  • A current account is a bank account for managing day-to-day expenditures

    • E.g. Paying bills, buying groceries, and receiving your salary

• It includes some common codes you may see on a bank statement

  • DD - Direct Debit

    • This is an automated payment system, often used for bills

  • DEB - Debit card

  • CPT - Cash point withdrawal

  • TFR - Transfer between your own accounts

  • FP - Faster Payments Service

    • This is a system used for bank transfers

• By categorising the incomes and expenditures across the month, and finding the total for each, the statement can be used to create a budget

• Income

  • Salary: £1900

  • Total in: £1900

• Outgoings

  • Housing (rent and council tax): £850

  • Groceries and shopping: £370

  • Utilities (gas, electric, water): £160

  • Loan repayment: £120

  • Transport & fuel: £60

  • Cash withdrawals: £50

  • Internet & phone: £48

  • Entertainment & social: £24

  • Moved to savings: £200

    • This is obviously a "good outgoing" !

  • Total out: £1882

• It is important to also consider longer term costs, or costs which don't appear each month, for example:

  • An annual car service

  • An appliance breaking which needs to be fixed or replaced quickly

  • Insurance which renews yearly

  • Buying presents for Christmas or other celebrations

  • Many of these costs will offer a monthly payment instead which can be useful, but be wary of any associated interest rates

Analysing a budget

• Once the budget is formed, it can be used to highlight areas that are:

  • Fixed: these cannot be changed

  • Variable: these can be flexible

• Some of these are more fixed or more variable than others

  • In reality, there are very few things that are truly 'fixed'

    • E.g. Utilities can often be reduced by changing supplier

    • Even loans can be consolidated to a different lender with a lower interest rate to reduce the cost

• Considering the budget above:

• Fixed income

  • Salary is most likely fixed, but there may be opportunities for pay increase in the mid to long term

    • There could also be opportunities for extra income streams, e.g. selling unwanted items, or extra part time work if suitable

  • There may be other sources of income, not listed in the current account

    • E.g. income from interest on savings accounts or investments

• Fixed costs

  • Housing

    • This is usually fixed for a long period of time, but can obviously change significantly when moving house

  • Utilities

    • More fixed than other types of bills, but better deals can sometimes be found by changing supplier or fixing gas and electric rates for a period of time

  • Loan repayment

    • It is essential that this keeps being paid so that more debt does not accrue

    • It is possible to consolidate debts which can lead to a reduced interest rate, reducing monthly payments

  • Internet & phone

    • Whilst these are fixed month to month, better deals can often be found by comparing different networks

• Variable costs

  • Groceries and shopping

  • Transport & fuel

  • Cash withdrawals

  • Entertainment & social

  • Savings

• All of these variable costs are more flexible month to month

  • There is always a minimum cost, e.g. transport to get to work, and buying food

  • However there are ways to reduce the variable costs by shopping at different stores, or limiting 'luxury' items more strictly