20: An annual household budget for financial preparedness

Each year on behalf of the ruling Government, the Chancellor of the Exchequer lays out for Parliament’s consideration his proposed budget for the coming year. The budget is based on a careful analysis of anticipated income from various revenue streams. This income then forms the basis his allocation to the Departments of State which, together with the lobbying of outside interests, have in the preceding months been presenting their case for a larger share of the total than they had received in the past. The Chancellor also takes a longer-term view of the country’s economic prospects, thereby allowing him a wider latitude in this process. He can borrow to fund desirable policies which cannot be immediately afforded in anticipation of more revenue from tax, for instance from higher levels of employment in the future. Or he can pay off part of the country’s national debt that has accumulated from previous years’ borrowings. Essentially, however, his task is to ‘balance the books’ – so that expenditure does not exceed income.

If this procedure is considered critical for the country’s economic management, how much more so is this necessary in our private lives? If we overspend, we can find ourselves paying high interest rates until we can afford to repay the capital. For this reason, it would seem advisable for householders to prepare their own annual budgets of anticipated income and expenditure. In this way, the spare income we have that can be used for discretionary purposes, such as holidays, after essential expenses have been covered, will be known.

Some would argue that there is no point in conducting this exercise in view of the lack of precision on the relevant figures. From personal experience over the last 12 years, I know this to be far from true. Moreover, the preparation of the budget, and its checking out at the end of the personal year when actual figures on income and expenditure are available provide information and understanding then enabling greater reliability in determining figures for future years.

The component parts of the income side of the household budget for the coming year – commencing on 1 January or 6 April – are relatively straightforward. Indeed, many people are used to setting this out in their income tax returns, albeit that they relate to the previous year.

-Income after tax (where applicable)
-Salary from employment or self-employment
-Savings and investments
-Land and property

The components for the coming year’s spending are straightforward and, on the basis of previous bills and bank and credit card statements, are in the main not difficult to determine.

-Expenditure (where applicable)
-Subsistence (groceries, household cleaning etc.)
-Personal care (clothing, laundry, hairdresser, medical and dental costs)
-Service bills (Council tax, gas and electricity consumption, telephone and email charges, TV licence etc.)
-Transport (car tax, petrol and oil, MoT and car maintenance, cycle repairs, railcard, bus and rail fares or season tickets)
-Repayment of loans and credits (mortgage on property and other borrowings)
-Insurance (building, household contents, car, other commodities such as white goods and word processor)
-Leisure (entertainment, restaurant, hobbies etc.)
-Holidays and outings (travel, accommodation, visits etc.)
-Subscriptions and reading (membership fees, newspapers, weekly/monthly magazines, books)
-Income tax (other than that paid directly from income)
-Contingencies (to cover unexpected and unplanned expenses, e.g. for building work, car repair, spectacles replacement)

The next step is to establish whether the anticipated income exceeds the anticipated expenditure. If it does, it may open up opportunities for investment of unallocated income, for instance on energy-saving devices delivering future reductions on fuel bills. If it doesn’t, the need to see what modifications should be made to bring them into line will become apparent, for instance, by planning a cheaper holiday than had been enjoyed in the previous year.

At the very least, the preparation of this annual budget for the single person or multi-person household will ensure that the financial side of living will be under better control than would otherwise be the case. Just because it is such an obvious, simple and straightforward procedure does not make it any less useful to prepare.

Originally published in Setting the World Alight: Ideas for Social Change (eds. Nick Temple et al.) 2003. (Preparing income and expenditure forecasts to aid balancing budget for the following year.)

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