The first step in debt management, or money management is to be in control and setting a budget.

To know about every penny that comes in and where every penny goes.

Ideally, when you open those envelopes that arrive on the door mat every day there should be no surprises.

If you are in debt and/or having financial difficulties, you need to bring yourself around to a situation where your income exceeds your expenditure.

You need to establish a budget and stick to it.

Budgeting and sticking to it are two separate things.

In this article I am going to cover setting the budget only, sticking to the budget will follow in a subsequent article.

Before carrying on it is worth noting that the principles outlined below are good for not only reducing debt, but also growing personal wealth overall. Effectively an investment for the future.

Download budget sheet

Establishing Costs and Income

The first thing to do is to recognise that all spending is not equal.  Some monthly expenditure is more important than others. For example, not paying your council tax for a few months could land you in jail.

budget planning sheetThe next thing to recognise is that some outgoings are fixed and others are flexible. With this knowledge you can begin to tackle your flexible monthly expenditure intelligently and make progressive steps to reduce outgoings both immediately and over time.

Additionally, you also need to recognise that even fixed expenditure may be reduced with the right approach.

The next thing to do is to list everything you spend money on over the course of the year.

I have put together a budget planning sheet for the purpose of helping you do this. You can download it by clicking on this budget planning sheet link.

You will see that the sheet is split into specific sections to provide some guidance on how to breakdown the list.

The sheet is also split into columns for yearly, monthly and weekly expenditure so that it is easier to group all like expenditure together even if you pay for it in different ways. The most critical items are towards the top of the list, i.e.:

  • housing costs;
  • rates and utilities;
  • important household services;
  • personal insurances.

With the critical items, the consequences of non payment can either be very high and/or occur very quickly, e.g. loss of house, loss of electric, water or gas supplies, imprisonment etc. It therefore makes sense to attend to these bills first. The next part of the list is critical in terms of day to day living, but much more discretionary, i.e.:

  • motoring expenses;
  • food and housekeeping;
  • miscellaneous goods and services;
  • personal and leisure;
  • sundries and emergencies.

This group includes some very fundamental items such as food – how food is purchased can have a massive impact on monthly expenses. For example, living on takeaways is obviously much more expensive than shopping carefully in the local price leading supermarket.

While detailing the first section is usually fairly clear cut (just check past bills), this section is fraught with difficulty as most of it can be cash or lumped spending. That is, a figure of £150 charged to a card from the local supermarket says nothing about what was purchased on the final bill.- Who knows, it might have been £150 of beer and crisps – it can be difficult to recall everything.

If it is just you in the household you have the relatively simple task of being honest with yourself about this sort of expenditure so that you can recognise how much is really being spent on what. If you have a partner, or live in a family group, it can be much tougher. The key word in this last sentence is of course honest. You will have to draw out the truth about what is really being spent and who is doing it.

If it is the two of you, you may have to recognise there is a key culprit, or that you are both as bad as each other. In any event this section is a land of opportunity as far cost reduction is concerned so spend time on it, get out past bank and card statements and go through them line by line.

If necessary walk through a typical week, or have everyone involved keep an expenditure diary so that everything is exposed.

The third section in the budget sheet is entitled ‘credit card and other debt’: in other words unsecured debt. Unsecured this may be, but non payment still has consequences in terms of your credit worthiness and other debt collection measures – including the use of county court judgements and even bailiffs.

The only difference between this debt and many of the more critical fixed costs outlined above is the time it takes for the consequences to bite. If you are having financial difficulties then the figures that should go in this section are minimum payments only. You will need to stop using all cards until the situation is resolved.

The last section on the budget sheet is for income. That is, income after tax or usable cash.

You need to make sure all income is included here – that is salary income from yourself, your partner or anyone else in the household that may contribute to the monthly bills. Also, if you do have shares that earn dividends, or bank accounts that earn interest, then these figures need to be included.

With all costs and income identified, we are now in a position to look at the overall picture and start developing a plan that will ultimately become our budget. With everything in place, there can only be three scenarios:

  1. Income is more than what you spend
  2. Income is the same as what is being spent
  3. Income is less than what is being spent

If income is greater than what is being spent then you can continue comfortably. Cost reduction, budgeting and careful saving will pay dividends in terms of loan reduction, early mortgage repayment, or even building up savings and personal wealth.

If income equals what is being spent, then the situation is a borderline one and action to reduce costs will need to be taken. However, it is unlikely that savings cannot be made and there is a strong likelihood you have caught things in time and can turn the situation around.

If what is being spent is more than what is being earned, then this exercise has not come a minute too soon and it is now time to grab the bull by the horns and turn the situation around.

Planning the Budget

In the previous exercise, we have identified all costs and all income and now have a clear picture of the current situation. Using this information, the budget we set will, in effect, be an overview of how we live our lives from this point on. There will be certain rules that we have to stick with, but we will know that sticking to the rules will allow us to achieve our future financial goals. The next part of the process is a little more painful and certainly more laborious than the last, but nevertheless must be done. Begin with the easy stuff first. This is the middle section on the budget sheet, i.e.:

  • motoring expenses;
  • food and housekeeping;
  • miscellaneous goods and services;
  • personal and leisure;
  • sundries and emergencies.

There will lots of low hanging fruit here (easy savings to be made). For example, let’s say your daily expenditure diary reveals that on your commute to work you buy a newspaper at the railway station and a coffee while you wait for the train. You buy lunch at the deli around the corner, but go to the local pub for a sit down lunch and a drink on a Friday. You have a drink with colleagues after work on average 2 nights a week and buy an evening paper to read on the train on the way back from work. This is what this expenditure looks like over the week:

Expenditure Unit cost Quantity Weekly cost
Morning coffee £2.00 5 £10
Morning paper £1.00 5 £5.00
Lunch at the deli £3.50 4 £14.00
Bar lunch £10.00 1 £10.00
After work drinks £3.80 2 £7.60
Evening paper £0.90 5 £4.50
Weekly total £51.10

Look at this again.

Every single item is discretionary, yet it will cost you £204.40 in a 4 week month.

You may not be able to give everything up on the list, but taking a flask of coffee to work with a packed lunch may be a start.

Many newspapers offer yearly subscriptions now that will cut the weekly bill by as much as half if you still need to have a newspaper every morning and every evening (do you?). The pub lunch could be dropped and the drinks with the colleagues after work cut back to one drink one evening a week – still sociable enough for most people.

In this example we might get back something like £130 per month. If there are two of you doing it in your household, it might be more like £260 per month.

You need to do this type of breakdown and cost reduction exercise on each line item.

Drop things like takeaways to a once a month treat and (if you do not already) learn to cook and cut out ready meals and other prepared food. You will not only save money, you will find you start living healthier too.

Examine closely how you do your motoring. Could you mange with one car instead of two?

Could you get rid of the gas guzzling 4 x 4, which would reduce insurance, maintenance, road tax and fuel bills – all at once?

Take a look at some of  the resources on this site to see if you could buy a smaller car at a manageable rate.

Hopefully you are getting the idea by now.

Once the individual figures have been reviewed and cost reductions identified, you can put the new figures into the budget sheet and we can now start to see the new budget taking shape.

Budget Sheet: First Section

Next we can look at the first section. That is:

  • housing costs;
  • rates and utilities;
  • important household services;
  • personal insurances.

These are largely fixed costs, but there are opportunities here too.

Housing costs such as rent or mortgages can be reduced.

Mortgage deals can be switched to take advantage of new lender deals, or fixed rate schemes taken on if interest rates look like rising in the near future – they do.

The term of the loan can be extended or (if things are really tight) payments dropped to interest only for a while – you need to ask the question.

If you are renting, could you manage with a smaller property, or a one in a less fashionable area?

Could you move closer to work at the same time and reduce daily travelling costs?

Take a look at what seems to be fixed costs such as personal, or household, insurances and compare rates and benefits.

Deals in this area change literally every week. Gas and electric costs can be reduced by switching supplier and turning down the heating and switching off lights and appliances when they are not being used.

Focus on this for a while and you might be pleasantly surprised at the difference it will make.

And so on.

The big savings often come from a combination of many small improvements rather than one big hit.

The last cost section is the credit card and unsecured debt one.

Much like insurances this may be a more flexible area than you think.

If your credit rating is good then you have lots of room here to take on new cards and deals with 0% interest rates.

Make sure when you do this that you close down the accounts you are transferring from.  That is, make sure you do not increase your overall indebtedness, or availability of debt.

Credit facilities are a bit like having biscuits in the cupboard. If you want lose weight,  it is better to get rid of the tempting biscuits. If you want to get a grip of your finances reduce credit facilities to what you need in emergencies only. 

If your credit rating is already poor, or bad, switching deals may not be an option for you, so you will have to find other ways to reduce your repayments.

One thing that creditors like to see is that their debtors are in control of the situation.

A well put together budget sheet like the one we are in the process of outlining here can be a huge help.

Using the budget sheet you can identify all income and expenditure that needs to be made before handling your unsecured debt. This will leave you a set amount that can be used to negotiate reduced payments to your creditors.

For example, let’s say you owed the following to 3 credit card companies:
Company 1 – £5000 Company 2 – £3000 Company 3 – £2000.

Let’s say also that, after the budgeting exercise, you had £100 per month left to pay for your unsecured debt. You could establish repayment plans with each credit card company in proportion to the amount owed.

So monthly payments could look like this: Company 1 – £50 Company 2 – £30 Company 3 – £20.

This is a separate subject in its own right, but this concept is offered here as a potential strategy that could be undertaken if interest rates allow and if you are able to negotiate this with the companies concerned.

Any other thing you can do in this area to consolidate debt and reduce overall interest payments needs to be examined closely.

For example, taking a single loan at a low interest rate is something you can do to consolidate your debt into a single low cost repayment solution.

However, you need to be very careful about making any loan consolidations that involve using your property for security.

There is probably another way, so explore the other ways first.

If you are forced into a loan secured on your  house you can only take this path if you have total control of you budget and are willing to get rid of all other forms of unsecured debt. If you do not do this you could be putting yourself on to a fast track to losing your house.


The last section is income. You may have been tough with yourself in the cost section, but the other dimension to the budget is of course income.

The more you increase your income, the less you need to cut back (or the bigger the benefit if you do).

Although writing ‘increase your income’ is very easy for me to do, in reality it is much harder to do for the vast majority of people.

However, there may be opportunities you had not considered which may be worth exploring such as:

  • overtime
  • weekend shifts
  • unsociable shifts
  • additional responsibilities
  • a second job

Switching jobs could also be an option as could be starting a completely new career.

This can be at a more fundamental level than you think. A little while ago I was talking to a friend of mine who was a male nurse. He had trained for the job and reached close to the top of his scale. However, he had decided to throw it all in and become a bus driver. This was because, as a bus driver, he would earn roughly the same basic wage, did not have to work night shift and could earn additional income from overtime.

In other words, increasing income is not always about getting further up the greasy pole, sometimes it is about taking a sideways move into another area you had not considered before.

In recent times the advent of the so called ‘gig economy’ has also thrown up new opportunities to take on paid tasks in the evening, or even make money by renting out a spare bedroom.

Be careful with this type of additional income. It may be useful for exceptional costs  (e.g. funding a holiday or boosting the savings), but usually cannot be relied upon for day-to-day budgeting.

One last point on income: while you have the budget sheet in front of you it is worth evaluating the cost of work.

In other words, try adding up all of the travel, parking, fuel, dry cleaning, child care, work wear, etc associated with your job then subtract it from your income – that will give you a true figure of what you really earn.

Could you earn less overall, but obtain more disposable income by working closer to home, or having two part time jobs?

It might be worth asking the question.

Finalising the Budget

The above represents a substantial investment in time and effort.

The end result will be a budget sheet which is accurate, personally optimised and which puts you fully in control of your own finances.

Having made this effort, you should now have identified specific allowances for each item and you now need to be sure that money is allocated each month to cover those items whether they occur weekly, monthly, quarterly or yearly.

It is unlikely that you will be able to reduce all of your costs, move house, change jobs, etc, all at once. You may have recognised already that this budgeting exercise should be a progressive thing that happens over time.

So to get started, you will need to ensure that costs are under control and outgoings are less than or to equal income.

Over time, you will look for cost savings and income increasing opportunities and can then revisit the budget sheet, put in the new figures and move on.

One completely free benefit to all of this is that, once it is all complete and you are sticking to it, you get a full night’s sleep whenever you want.

Next Sticking to the budget