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The word 'budget' means an amount of money we have available to spend.

The Chancellor's budget (which we all dread) is just the amount of money the government is able to spend. The problem is that the government's spending money comes from our taxes, so when the Chancellor wants to raise his budget, we all pay more tax.

Let's do a quick estimate for the Chancellor.

Petrol up by 1p a litre

By how much will his budget increase?

We need several pieces of information to help us:

  • About 20 million drivers in Britain
  • Typical car does 10 miles per litre
  • Typical driver covers 12,000 miles per year

This gives a total of 1,200 litres per year per driver.

  • If each litre increases by 1p, the driver will pay an extra
    1,200 x 1 = 1,200p or 12
  • If 20 million drivers each pay an extra 12, the government will receive:
    12 x 20 million = 240 million

That's nearly a quarter of a billion pounds - not bad for a penny a litre!

The government is lucky - it looks at how much money it needs to spend and then adjusts its income (taxes) to cover its spending.

Most of us have to work our budgets the other way around; we look at our income first and then decide how much we can afford to spend.

People who try it the government's way usually end up in trouble!

Your budget
Your budget is the amount of money you have available to spend. You can have several different budgets at the same time.

For example:

  • a bills budget - an amount of money to spend on paying bills
  • a food budget - an amount of money to spend on food
  • a clothing budget - an amount of money to spend on clothes
  • an entertainment budget - an amount of money to spend on having fun, at home or on the town
  • a holiday budget - an amount of money you can afford to spend on a holiday.

The skill of budgeting, or 'balancing a budget' is one that can be fun to learn and may keep you out of debt. If you want to learn more about budgeting in detail see the Spending and budgeting section.

The idea is simple, if you overspend in one area, you must cut your spending in another area to compensate. Your sub-budgets must add up to less than your overall budget.

Your overall budget is the total amount of money you earn. Obviously, you cannot overspend this budget without getting yourself into difficulties.

Each of your mini-budgets must fit inside your overall budget (your income).

Activity: In the quiz below, all the budgets are within the overall limits and there is some space (some money) left over, shaded in pink. This pink space could represent your entertainment budget. Have a go by dragging all of the items onto portions of the pie chart and see if you can see where most of your money might go.

The most important skill in budgeting is working out your priorities. This means deciding which expenses are most important and which are least important.

The most important expenses are usually the ones that we are required by law to pay. These include taxes, debts and utility bills (gas, electricity and water).

The least important are usually life's little luxuries - a bottle of wine, the latest gadget, or that gorgeous pair of shoes.

There are some useful sections on priorities elsewhere on this web site.

Imposed or planned?
Some budgets are imposed, they are fixed by someone else and we have no control over them. Other budgets are planned by ourselves.

An example of an imposed budget is Income Tax. The amount is set by the government and we cannot change it. A planned budget might be the amount you put away for a holiday; you decide for yourself how much to save.

Many expenses may seem to be imposed, but are not really.

Take a gas bill, for example. The bill you have just been sent is imposed - you cannot alter it, but if it is too high you can alter your next gas bill by using less gas or perhaps changing supplier.

Needs or wants?
Try dividing your budgets into needs and wants and give the needs a higher priority.

Activity: Move over the diagram on the right for a graphic example of the difference between 'needs' and 'wants'.

To sum up:

  • Divide your spending into budget areas.
  • Decide on priority budget areas
  • Examine your budgets for needs and wants.
  • Make sure you can pay for your needs by cutting out the wants where necessary.
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