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ConsumerUK Guide


Budget your way out of debt

Every business produces budgets so that it can plan its spending and manage it's cash flow. So why are we as individuals any different, the answer is we are not. Really every family can be looked at as a business (think of it as your family business) and as such you need PLAN.

Those that fly by the seat of their pants, meaning those that do not readily know how much they spend each month and what they spend it on are destined for financial difficulties.
Where to start
Firstly you need to prepare your personal budget, which is basically a document that lists your income and outgoings. To do this follow these easy steps:

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List your income, which could be:


  • salary
  • rental income
  • benefits
  • child maintenance
  • tax credits
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Now list your outgoings, which could be:
  • mortgage payments
  • household utility bills (gas, water, electricity)
  • council tax
  • telephone
  • TV license
  • home broadband
  • cable TV
  • household shopping
  • takeaways
  • pets (food, vet bills)
  • hair cuts
  • cigarettes
  • newspapers
  • one-off household costs
  • loan repayments
  • bank costs
  • other finance costs (car leases etc.)
  • childcare
  • fuel
  • other travel expenses
  • birthdays/ christmas costs
  • leisure costs (cinema etc..)


Now analyse

So you will now have established whether your income is more or less than your outgoings. Obviously you want it to be 'more' than your outgoings but the chances are that it wont be. Businesses aim to have what is called 'headroom', which basically means that each month there is cash left over after all outgoings have been paid. You need to aim to have exactly the same.

 Ideally try to make sure that you have at least 5% of your income set aside each month. So, if you have worked out that your total income is £1000 per month you need to make sure that £50 of this is not being spent on your regular outgoings (this is now your Headroom Cash).


Now we need to get you out of debt

The fact that you are still reading this means that your outgoings are greater than your income, so you have no Headroom Cash. You now need to do 3 things to overcome this:

i) Explore if you have any opportunity to earn additional income - this is not easy and if you can't don't worry, see below

ii) go through your outgoings and decide which ones you absolutely have to pay. At this stage you are trying to reduce your outgoings to a point where you end up with Headroom Cash of 5% of your income. So using our example above:

If your income is £1000 per month and your outgoings are £1100 per month, you need to identify outgoings of £150 that you are not going to pay.

Now that you have your £150 of monthly outgoings that you are not going to pay what do you do next? Here are the next steps:

i) you now need to divide up your Headroom Cash between these outgoings and work out how much you could pay them per month. For example:

Lets say that your £150 of outgoings is between 3 loans which each cost you £50 per month. This means that each of these debts represents one third of the £150 that you need save.

Next: take your Headroom Cash, which in this example is £50 and divide your debt up (in this case one third each as mentioned above - so you £50 divided by 3 = £16.66)

ii) you now know how much you can afford to pay per month towards these 3 debts. So you now need to contact the 3 loan companies and tell them that you cannot afford the usual monthly payments (in this case £50 per loan per month) but that you can afford £16.66 per month).

IMPORTANT NOTE: It is now important that you do not take on any additional outgoings. If you do take on further outgoings you need to consider the 5% Rule above.










Whilst every effort is made to ensure that the legal information contained on “consumeruk” is accurate, it does not constitute legal advice tailored to your individual circumstances. If you act upon it, you acknowledge that you do so at your own risk. Neither the Proprietor nor Dean Dunham can assume responsibility and do not accept liability for any damage or loss which may arise as a result of your reliance upon it.


Last updated 14.07.2014

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