Knowing what you can afford
Before you borrow, it’s important to consider what you can reasonably afford to repay.
Figuring out your regular income is the first step in creating a budget. Although for many people, wages from an employer is their main source of income, you may also receive money from:
- Self-employment, whether that’s your full-time job, or something you do part-time.
- Benefits, such as tax credits or disability allowances.
- Investments, such as ISAs, share dealing, property or premium bonds.
- State or private pensions.
- Gifts or inheritance.
If you have shared financial commitments, such as joint accounts or utility bills, it’s worth assessing your household income as a whole, even if you generally keep your personal finances separate.
For many couples, money is a stressful topic, but knowing where you stand could help you to tackle financial problems, and take a step towards your shared or personal financial goals.
It’s also important to make sure you can afford to cover financial commitments you’re solely responsible for.
Get all of your financial information together, and list out your essential monthly expenses. These could include things like:
- Housing costs, such as rent, mortgage payments, service charges, site fees or ground rent.
- Household bills, like council tax, phone and internet connections, a television licence and subscriptions, or utilities such as water, gas and electricity.
- Insurance policies you pay monthly, such as building and contents cover, car, private healthcare, dental or pet insurance.
- Living expenses, like food, pet products, cleaning products and essential clothing.
- Travel costs, such as car, fuel or public transport expenses.
- Healthcare items, like toiletries, cosmetics and prescriptions.
- Leisure and entertainment, such as gym membership.
- Repayments on existing debts, like credit cards, car finance, loans or store credit.
- Childcare costs, such as nursery or school fees, uniforms, trips, school dinners and clubs.
- Other care costs, such as home help services, respite care, nursing and care homes.
- Child or spousal maintenance payments.
- Charity donations.
Your budget should also account for things you pay for less frequently, but perhaps once or twice each year. These could include things like:
- Vehicle expenses, such as road tax, insurance renewals, tyres, servicing or an annual MOT.
- Seasonal essentials, such as winter coats and footwear, or summer clothing.
- Insurance policies you pay annually, such as car, medical or home cover.
- Annual passes, such as train, local attraction or cinema tickets.
- Celebrations and gifts for birthdays, festivals and feast days.
Finally, there are the things you may want to save up for:
- Holiday costs, including travel insurance, transport, accommodation, food and entertainment.
- Unexpected costs, such as emergency home or car repairs.
- Non-essentials, like treats, meals out and luxury goods.
- Life events, such as a wedding or significant birthday.
- Future needs, like university fees and housing.
Based on your income and your outgoings, are you living beneath, within or above your means? Knowing where you stand, could help you to make more informed decisions in future.
Planning to apply for credit?
Lenders and other service providers will usually complete a credit check as part of their decision-making process. In addition to information from your credit record, they may also consider: