How to make a budget when you are struggling with debt

When you owe money, a budget has a different job from the usual “where does my money go” exercise. It has to show three things: what you need to live on, what you must pay to protect your home and supplies, and what you can honestly afford for everything else. That last figure becomes the basis for every conversation with a creditor or adviser.

Generic rules such as spending half your income on needs and a fifth on savings do not fit well once you are in arrears. They assume your needs are covered and there is money to spare. The method below starts from the other end.

Step 1: gather your real figures

Before you write anything down, collect:

• the last three months of bank statements, or screenshots from your banking app
• recent payslips, benefit award letters and any pension statements
• your rent or mortgage statement, council tax bill and energy bills
• letters from creditors showing what you owe and what they are asking for.

MoneyHelper’s budget planner suggests having payslips, bank statements, bills and your banking app to hand for the same reason: estimates are almost always too low.

Step 2: work out your monthly income

Use take-home pay after tax, National Insurance, pension and student loan deductions. Include every regular source: wages, benefits, pensions, maintenance you receive, and money from a lodger.

Turn everything into a monthly figure:

• weekly amounts: multiply by 52, then divide by 12
• fortnightly: multiply by 26, then divide by 12
• four-weekly: multiply by 13, then divide by 12.

If your pay varies, use an average of the last three to six months. If it is falling, use the lower recent figure.

Step 3: list essential spending, priority costs first

Write down what you spend each month, starting with the bills that protect your home and supplies: rent or mortgage, council tax, gas and electricity, and water. Then the costs that keep you going: travel to work, childcare, food and household items, phone and broadband, clothing and personal costs, and insurance.

Do not forget costs that come once or twice a year. Car servicing, school uniforms, birthdays, Christmas and the TV licence all need to be in there as a monthly amount, or they will turn into next year’s debt.

It also helps to build in a small amount for emergencies. The Standard Financial Statement, the budget format used by debt advisers, now includes a savings category, recognising that even a small buffer helps people keep a plan going when something unexpected happens.

Step 4: add payments towards priority arrears

If you are behind on rent, council tax, energy or another priority debt, include a realistic monthly payment towards the arrears. Our guide to priority and non-priority debts explains which debts come first and why.

Step 5: see what is left for other debts

Take your spending and priority arrears away from your income. What remains is what you can offer to credit cards, loans, overdrafts and other non-priority debts.

If there is money left, many advisers share it between those creditors in proportion to what you owe each one, so that nobody is favoured. That is known as a pro rata offer.

A worked example

This is a hypothetical example with round numbers. It is not based on real Standard Financial Statement figures.

Alex and Sam rent a flat with their young child. Alex takes home £1,850 a month, Sam £700, and they get £110 a month in benefits: £2,660 in total.

That leaves £378. They are behind on council tax and electricity, so they offer £40 a month to the council and £30 a month to the energy supplier. That leaves £308 for their other debts, which they share pro rata:

The contractual payments on those debts might be much higher than £308. The budget shows why they cannot pay more, and gives each creditor the same evidence. If the creditors freeze interest, the debts would take a little over four years to clear at this rate. If they do not, it takes longer, and it may be worth asking a debt adviser about other options.

If you use our checker, we may pass your details to a licensed insolvency practitioner or debt adviser.

What is the Standard Financial Statement?

The Standard Financial Statement (SFS) is the single income and expenditure format used across UK debt advice, run by the Money and Pensions Service. It is replacing the older Common Financial Statement, and it is designed to be recognised by lenders, councils, utilities and debt collectors alike.

It comes with spending guidelines for three “flexible” areas of spending: communications and leisure, housekeeping, and personal costs. The guidelines are worked out from the ONS survey of household spending, adjusted for the number of adults and children in the household, and updated every year, taking effect on the first Monday of April. Costs such as rent, council tax and energy are not measured against a guideline: you use your actual bills.

The SFS itself is not meant for the public to fill in. A debt adviser will turn your budget into one. What it means for you is that your own budget should use real figures and be ready to explain anything that looks high. For how creditors and advisers read a budget, see how to fill in an income and expenditure form. If you are thinking about an IVA, the same format is used to set your payment: see how much an IVA leaves you to live on.

What if there is nothing left, or you are short every month?

Then the budget has done its job by showing that the problem is not your spending discipline. Some things to look at:

• Income you are missing. A benefits check can turn up money you are entitled to. MoneyHelper has a free benefits calculator.
• Help with bills. Council tax reduction, social tariffs and energy supplier hardship funds.
• Emergency help if you cannot cover food or heating this week: see emergency money and crisis loans.
• Token payments. FCA rules say lenders should consider accepting token or reduced payments for a reasonable period from customers who show that paying more would mean not meeting priority debts or essential living costs.
• Time to think. In England and Wales a debt adviser can consider Breathing Space, which pauses most creditor action for up to 60 days.

If your budget shows you cannot realistically clear your debts, a formal solution may be worth looking at. Debt solutions compared sets out the options, from an informal debt management plan to a debt relief order or insolvency.

Free budget tools

• MoneyHelper budget planner: free, adds up your income and outgoings and shows where the money goes. You can enter costs per year and it works out the monthly figure.
• MoneyHelper bill prioritiser: sorts your bills into the order to deal with them.
• A notebook or spreadsheet using the headings in the worked example above.

Mistakes that break budgets

• Leaving out yearly costs, then borrowing to cover them.
• Underestimating food and household shopping. Check your bank statements rather than guessing.
• Including debt payments you have already agreed to stop, or leaving out ones you are still making.
• Offering creditors more than you can keep up because you feel under pressure. A plan that fails after two months helps nobody.
• Not updating it. Rework the budget whenever your income, rent or household changes.

What to do next

1. Gather three months of bank statements and your latest payslips or benefit letters.
2. Fill in a budget using the steps above, priority costs first.
3. Take it to a free adviser to check it and help you talk to creditors. Free, impartial debt advice is available from MoneyHelper, StepChange, Citizens Advice and National Debtline: see where to get free debt advice.
4. For other money problems, see our debt problems hub.