Most people know roughly what they earn. Far fewer can say what share of it is already committed, how much is spent by choice, or how long they could cope if their income stopped. Those are the figures that show whether a budget is working.
In this guide, V5 Solutions explains each of the key budget figures in turn. For every one we cover what it measures, how to calculate it and what the result tells you, so you can build an accurate picture of your own finances.
Before You Start: Gather Your Information
Accurate figures depend on real data rather than estimates. Collect the following before you begin:
- payslips or income statements for the last three months
- bank and credit card statements covering the same period
- details of any bills paid annually or quarterly
- a list of your debts with their monthly payments and balances
Three months gives a fairer average than one, because it smooths out one-off events such as a birthday or a car repair.
Income: The Figure Everything Else Depends On
How to calculate it
Use net income, the amount you actually receive after deductions such as Income Tax, National Insurance, workplace pension contributions and student loan repayments. Include regular benefits, maintenance payments and earnings from any additional work.
What it tells you
This is your ceiling. Every other figure is measured against it. If your income varies, basing your budget on a lower-than-average month means anything above it can go towards savings or paying down debt.
Outgoings: Separating Fixed Costs From Flexible Spending
Fixed costs
Fixed costs are commitments that stay broadly the same each month, including housing, council tax, utilities, insurance, broadband, phone contracts and childcare. Convert irregular bills into a monthly equivalent. A bill of £240 paid once a year, for example, becomes £20 a month in your budget.
Expressing fixed costs as a percentage of net income is useful. The higher the share, the less flexibility you have when prices rise or income falls.
Flexible spending
Flexible spending covers costs you influence day to day, such as groceries, fuel, clothing, eating out and entertainment. Categorise three months of transactions and calculate a monthly average for each group. This is usually where the quickest savings are found.
Debt: How Much of Your Income Is Already Committed
Your debt-to-income ratio shows what proportion of take-home pay goes on credit repayments. To calculate it, add up your monthly payments on loans, credit cards, car finance, store cards and buy now pay later plans, then divide by net income and multiply by 100.
A household taking home £2,400 a month and repaying £480 has a ratio of 20%. Lenders consider this kind of measure when assessing applications, and it is just as useful for your own planning. A rising ratio means more of your income is tied up and less is available for essentials or saving.
If repayments are already hard to manage, free and confidential help is available from StepChange and Citizens Advice.
Resilience: Your Savings Rate and Emergency Buffer
Savings rate
Divide the amount you save each month by your net income. Putting aside £120 from £2,400 gives a savings rate of 5%. Tracking this percentage over time shows whether your position is improving, even when the amounts are modest.
Emergency buffer
Your emergency buffer is best measured in months. Take the savings you can reach quickly and divide them by your essential monthly outgoings. Many guides suggest working towards three to six months, but a first milestone of one month already reduces the chance that an unexpected bill turns into new debt.
Reading the Figures Together
Individually, each figure tells part of the story. Together, they show where to act first:
- Fixed costs take most of your income: review contracts, tariffs and renewals.
- Flexible spending is higher than expected: set limits for the largest categories.
- The debt ratio is high or rising: many people direct spare money at repayments and seek free advice early.
- There is no buffer: a small automatic saving, even before other goals, is a common starting point.
This article is general information, not financial advice. The free budget planner from MoneyHelper can do the arithmetic for you and is a useful way to check your results.
