# How to do the maths on affordability?

I have a bad or no idea on how to budget. We are moving but I don't know If I can afford the rent as the family grows and I need my own study. How can a person measure how much to spend on food, car, bills or rent from his salary? Is there a formula to keep in check?

I find myself looking at my account every single day and get tensed and sad because almost whenever the money (pay) comes in I freak out that after everything there is nothing for us to enjoy or save.

So basically I wanted to know how to calculate how much should I be paying for car, rent, etc.

• Until you are living with a comfortable surplus of funds, you should be paying as little as possible for car/rent,etc. Live in a less than ideal situation in the short-term to get your finances in order for the long-term. – Hart CO Nov 21 '17 at 16:27
• There is a rule of thumb that says your rent should be no more than 30% of your income. Obviously that is very dependent on location and your income, but it is a good starting place. If you are paying much more than that, I would start looking for cheaper housing if possible. – BlackThorn Nov 21 '17 at 16:49
• @TBear whilst I agree with your point entirely, just to add a little context from the UK market. Average rent for outside London is ~£750 whilst avg salary is ~£28,000 which gives a net monthly income or ~£1,650 (I assumed a student loan was payable of ~£75) therefore on avg people would be paying ~45% of their salary on rent. These are obviously all rough numbers. – DavidT Nov 22 '17 at 8:28
• Your question title translates to: How do I budget? – henning -- reinstate Monica Nov 22 '17 at 16:02
• @Acccumulation How do you go about that exactly? As your expenses start going up, start getting rid of some family members? – Masked Man Nov 24 '17 at 5:55

You are at the point that many millions of people are at (and where I used to be) - you have no idea where your money is going. You just spend, spend, spend until there's nothing left, and/or you borrow more to keep going.

There are general rules of thumb on how much house and car you can afford, but there is a great deal of personal variation. Housing and utility costs vary greatly from location to location. City-dwellers can use public transit instead of buying and maintaining a car. How much other debt do you have that you need to pay off? Do you have expenses that are not common (e.g. medical bills)? A more personal approach would be to figure out your own budget.

The first step is creating a written budget. Figure out how much you can spend in total (i.e. your take-home pay) and the start allocating that money to expenses until you run out.

I started by looking backwards. Look back at how much you spent on each category each month. List them in order of priority (e.g. food, health, housing, utilities, transportation, entertainment, everything else). If the money runs out you either stop spending or reduce spending in another category (e.g. can you cook a few extra meals at home instead of going out? Can you take lunch to work instead of a drive-through?)

The amount you have left over now indicates how much more house and car you can afford. Once you get to a point where you can budget comfortably then you can start looking at saving for retirement and other long-term goals.

This worked for me (and highlighted some areas where I overspent) because I had good categorized records (ironically because I used credit cards incessantly, which I mostly stopped once I created a budget). If you don't have good records, then you have to estimate. How much do you think you spend on food, gas, etc. each month? Then set aside that much and once it's gone don't spend anymore. Now obviously you're not going to stop eating, but the idea is to plan ahead and realize "I have only \$20 left to spend on food this month - maybe I shouldn't go to the movies". It takes lots of practice, and you won't get it right very often. If you have enough left over, you can set aside some as a "cushion" in case you do go over your budget, but if you want true financial discipline you should start by reducing other categories first.

This is not easy by any means. It will take moths of practice and trial-and-error to get to a point that you're comfortable with the lifestyle that you can afford.

So in the end, there are only two variables in your equation - income and outflow. Do you want more house? Either spend less on other things or increase your income.

• Why would credit cards provide better records than debit cards? – gerrit Nov 22 '17 at 0:35
• @gerrit better than cash I imagine – DonQuiKong Nov 22 '17 at 1:07
• @gerrit They don't - I was lumping those together. – D Stanley Nov 22 '17 at 14:15

Whenever I'm looking at whether I can afford a new fixed monthly cost I go over my account statement for the last three months (or last three "normal" months in the event that there has been something unusual recently) and list the items into four columns on an Excel sheet -

• Fixed Essentials - costs that happen every month and that have to happen, stuff like rent, utility bills, insurance, any loans or credit cards etc

• Fixed Niceties - costs that happen every month but that I could cut if I needed to, stuff like Netflix, Spotify etc

• Variable Essentials - costs that I incur on an adhoc basis but are essential, I'm talking things like food, fuel etc

• Variable Niceties - costs that I incur on an adhoc basis but could be cut if required, things like buying DVDs or games etc

I sum up the "Essentials" columns and divide by three to get a rough monthly average. This is what I have to spend so I subtract this from my monthly income which tells me what I really have available to "spend" in any given month. Performing the same "sum and divide by three" operation on the niceties and subtracting that from my "available to spend" figure tells me what I have left on in an average month - if this is greater than the new monthly cost I'm considering (allowing for some reasonable buffer as well - you don't want to be running to zero each month!) then I can afford the new cost and then I just have to weigh up whether I think it's worth it or whether I'd rather use that for something else. If it's not sufficient and I really want/need whatever the new cost is then I can start looking at the fixed and variable niceties to see if I can make savings there.

If after trimming the niceties where I can I still can't afford it but still really want/need it then I'll start looking at the Essentials to see if there are ways to reduce them through switching utility supplier or changing my shopping/eating habits etc.

• Also consider looking at the list of "Fixed Essentials" and shop around to see if you can get cheaper deals on any of these. Changing insurance/energy suppliers, etc. Budget toward paying off loans/credit cards sooner rather than later. – user64927 Nov 21 '17 at 14:56
• @Snow - good point, I'll edit something in to reflect that. – motosubatsu Nov 21 '17 at 15:00
• what is the reason to divide it by 3? – Nofel Nov 21 '17 at 15:33
• because you're looking at 3 months worth - so divide it by three to get the average for one month – motosubatsu Nov 21 '17 at 15:35
• I took almost this approach except I also looked at annual expenses (most things either occur at least one in a 3-month window or are annual). In my spreadsheet I kept it monthly, so divide the annual cost by 12 and enter that amount. However, this might not work for you if you have cash flow issues and a couple of months when all the annual expenses come in, so you need to look at both "average" and "peak" months. – Vicky Nov 21 '17 at 15:50

Money management is data-driven. You've been operating on "how you feel" and "what should be", and that's why it hasn't been working.

First you collect data on how you actually are spending money. Record every expenditure and categorize what it was used for. Go back 6-12 months if you can.

You don't need blistering detail, in fact I adjusted my lifestyle to make that easy. Fast food meals, movie tickets, USB cables, anything too small to bother recording, I just pay cash for that. Everything else: check, ACH or credit card.

It is not excessive to do it in Quickbooks or similar if you know the app. Whatever is most efficient for you.

Now you have a log of what you've been spending on what in a time oeriod, and a log of your income. Congratulations, you have a "Profit & Loss Statement", a basic financial planning tool.

Now you can look at it accurately, decide if the money you are spending in each department brings the value and joy that fits the expenditure, and change what you want. You may decide you'd rather save \$1000/mo than run a \$200/mo deficit.

Changing is simply coming up with different numbers that you think are achievable. Congratulations, you have a budget or spending plan.

Again, data driven. The point is, your spending plan is based on your actual experience with past expenditures, not blind-guessing.

Then, go out and make it happen.

• Going back 12 months seems extensive, but you avoid to miss certain fixed yearly costs (like insurances, e.g.) that I myself tend to forget easily. – Dubu Nov 22 '17 at 13:06

The other answers are good, I would just like to add certain points, taking this question together with the previous ones you have asked here.

How can a person measure how much to spend on food, car, bills or rent from his salary? Is there a formula to keep in check?

## As little as possible while in heavy debt.

Basically, it may well be that your best option would be to move to a smaller apartment or worse location to bring down rent, possibly forget about your own study in the worst case, sell the car and use public transportation, eat as many meals as possible at home, bring boxed lunch from home to work, if this applies, etc -- whatever makes a saving and sense to you.

Regarding food, this is the point where it is usually possible to save a very significant amount, if you are prepared to make food at home. Unless you are already doing it, look around for articles such as "living on 20 pounds a week" or so, maybe they will give you ideas you can use (eg. How to eat on 10 pounds a week: shopping list and recipes) -- where you are shopping is crucial here as similar items can differ in price significantly between different chains.

If the electricity bill is significant and you are at home a lot, you could try to bring it down by changing all bulbs in your home to LED ones, unless it has already been done. Yes, they can cost 2-3 more than eg. halogen ones, but they use 5-10x less electricity.

Forget credit cards, if possible. Use debit cards so you know the money you spend does not get you into more debt. One question you asked here was about exchange rates -- if you work with different currencies a lot, there are several companies such as Revolut or N26, which offer accounts with debit cards that use near FX rates --- in my experiencee I could save around 10-15% on currency conversion EUR/GBP, using Revolut, compared to my local bank rate, for example.

I find myself looking at my account every single day and get tensed and sad because almost whenever the money (pay) comes in I freak out that after everything there is nothing for us to enjoy or save.

Well, yes. That is nearly the definition of too much debt.

The point about going to the extremes of reducing expenses I outlined above, is that the more you can reduce your expenses while struggling with debt, the faster you'll get out of it. It might be hard to adapt, but it will be better, if you can calculate how long it will take to get you back on feet and know that, eg. "in 6 months I can start to think of savings and carefully upgrading my lifestyle back".

In turn, the smaller the reduction of expenses, the more prolonged the process -- you might be looking at 2-3 years of insecure/constantly frustrating/risking more debt lifestyle, instead of 6 months of severely reduced one.

Alternatively, if things go too bleak, you might consider declaring bankrupcy -- although I am not sure how feasible it is in the UK.

• "Regarding food, this is the point where it is usually possible to save a very significant amount" 2nd this. I have personally reduced my food costs by 50%, and it started by noticing how outrageous my spending had become. – James Nov 22 '17 at 18:14

BLUF: Your question is subjective and as such, the answer varies from person to person.

The rent you "should be" paying is the tricky part. Minimum is whatever is the least you can find. Maximum is the most you can afford. To be financially responsible, you would live as close to that minimum as you can bear. However, this can cause stress if you are trying to subsist on lower than you can actually bear.

You have certain expenses that are required to survive. Housing, clothing, food. These are your needs. Everything else is convenience or luxury.

Best way to develop a budget is to list the categories of everything you have spent over several months. Figure out a monthly amount for each one. Divide them up into groups of things you need, things that make life bearable, and things you can do without.

Then start with your income and figure out how much you bring home each pay period. When you get paid, allocate the money to your needs until they're all covered. If there's anything left, fund the second group, then on to the third. Continue tracking your spending and adjust where you allocate the money. After 2-3 months, you'll start having a decent idea on how much you actually spend on each category. You'll probably find areas where you're spending a lot more than you realize.

The method I've just described is the one advised by "You Need a Budget" software, but you don't need the software to use the method. Though it does help.

Also, if there's any debt, that goes in with the 'needs' because we all need to pay our bills.

• I would add "cost for transportation to work" to the "needs" list, because it is an essential cost you need to pay in order to make the money for paying everything else. You also might want to add that utilities are part of housing expense. – Philipp Nov 21 '17 at 15:46
• The specific categories in each group would vary by the individual. Employer reimbursed public transportation, bicycling, walking are all ways that people get to work that cost (next to) nothing. For some folks, driving is a convenience, because bicycling or walking could be used. But yeah, whatever transport costs to get to work would be a necessary expense for anyone who works outside the home. – Xalorous Nov 21 '17 at 16:21

Nofel.

So basically I wanted to know how to calculate that how much should I be paying for car or rent etc?

I'm not big on percentages. Instead, I prefer hard numbers based on what you owe and what you earn.

Here are rules of successful budgeting which I developed when deep in debt. They apply to everyone:

1. Track all of your spending. Every latte, every sticky bun, can of Coke from the vending machine, lunch you buy instead of "brown bag", bag of chips you buy, groceries, insurance, after work pints, etc, etc, etc. Everything.
2. Sift through that and see where you're wasting, can cut costs, etc.
3. In a big list, ordered by date, record how much you get paid (if your pay is variable, be conservative: use the low numbers), and what your expenses are. This way you can know when you might go negative.
4. Remember quarterly, semi-annual and annual expenses, taxes, etc. Save a fraction of them each month.
5. If you've got a CC, pay it off every month.

After going through this exercise, you definitely might realize that you need to move to a less expensive apartment, or trade your car in for something smaller, drink less, etc.

Or even get a second job.

• Saving an appropriate fraction of non-monthly expenses every month is probably the best thing I ever did with my finances to smooth over the bumps. It takes a while to set up (basically, you're going to have to go through the last year's account statements, possibly a little more, and flag every recurring but non-monthly bill, then work out a monthly equivalent cost and a plan to have enough cash when the bill comes due next) but once done, as long as you maintain it when amounts change, you never need to worry about those bills again because you know you have the money on hand to pay them. – a CVn Nov 21 '17 at 15:45

To point #1:

We are moving but I don't know If I can afford the rent as the family grows

I would start by looking at your debt-to-income ratio. In the US, most banks look at this for mortgage purposes, but it also gives you a general idea of what monthly mortgage payments will be comfortable given your particular financial situation. Think of it this way, if a bank is unwilling to lend you money because of a high debt-to-income level, this indicates that you have very little leeway with regard to your budget. So a lower number indicates that you will have more flexibility and comfort with meeting your rent/mortgage obligations when unforeseen bills pop up. The article below indicates having < 43% DTI is ideal (in the US).

Here's a link to a debt to income calculator and some extra info (I suggest finding one aimed at the UK market):

AssetBrief debt to income calculator

WellsFargo debt to income calculator

Why is the 43% debt to income ratio important?

Point #2:

How can a person measure how much to spend on food, car, bills or rent from his salary? Is there a formula to keep in check?

Other answers have addressed how to make a budget, so I will not repeat that. However, here's another angle with regards to spending/saving. This article recommends 50/30/20:

According to the popularÂ 50/30/20 rule, you should reserve 50 percent of your budget for essentials like rentÂ and food, 30 percent for discretionary spending, and atÂ leastÂ 20 percent for savings.

In the real world, these goals may not be realistic, and different people have different ideas about how aggressive to be with regards to savings. However, you can get a general idea and adapt for your particular needs.

Point 3:

I find myself looking at my account every single day and get tensed and sad because almost whenever the money (pay) comes in I freak out that after everything there is nothing for us to enjoy or save.

2. Adapt spending habits, try to save more.
3. You might need to invest in education and or look into ways of increasing your income (if cutting spending is not enough).
• "Adapt spending habits, try to save more." Presumably you mean "adopt". – Acccumulation Nov 23 '17 at 1:43
• @Acccumulation 'adapt' makes perfect sense. Anyone who routinely spends money will have habits - the advice here is to change them. – AakashM Nov 27 '17 at 10:31

As advised you need to budget, but there are a few simple things you can do to make it easier.

1. Work out how much your fixed bills are every month, for example, council tax, gas and electric, mortgage and rent etc.

2. On pay-day, move an amount of cash equal to this into another bank account when you get paid. It's easier if this other account, let's call it a bills account, can pay the bills automatically via direct debits, you can then forget about it.

3. Now your budget should tell you how much you spend on things that are more variable, food, fuel, travel etc. Again on pay-day, move an amount of cash aside to cover this (plus a small buffer amount) into another account.

4. Whatever is now left in your main account is yours to spend or save as you see fit. You just need to make sure you are sticking to your budget and it's as easy as that. If you cannot pay direct debits from the other accounts you just need to move the money over to cover them when they need paying.

Most banks will let you set up extra accounts so you can mvoe the money easily using internet banking or by a monthly standing order. If they won't let you have several "current" accounts you can use savings accounts but will need to manually move the money around as the bills are due. If you get all your direct debits to debit on pay-day, that makes it even easier.

If you are struggling for money then prioritise paying off debt first and prioritise the debt with the highest interest rate.

Before you can work out a budget, you should first work out what you are spending and on what.

Sit down with your bills and bank statements for the last three months. Sort by

1. Periodic mostly stable expense (electrical, car payment, rent) (sub-sort by period; monthly, weekly, yearly)

2. Periodic stable income (sub-sort by period)

3. Irregular cost

4. Irregular income

For each category, annualize it. So the weekly bills get multiplied by 52, the monthly by 12, the bi-weekly paycheck by 26, etc.

Cash withdraws not accounted for count as an irregular cost, for now.

For the irregulars (which can involve food unless you subscribe to it), take the period you are calculating their costs over, and scale it to a year. So 3 months means you multiply by 4.

Insert this all into a spreadsheet. You will now have an idea what your annual costs and expenses are and rough categories.

You can sub categorize them. So, rent is a repeating regular expense; you can give it its own category instead of clumping it in with other bills (like electricity).

Some categories may be bigger than you realize.

It takes effort to save money. Some areas are easier to save money on than others. Some areas are more vague, like "cash withdrawl".

But you now have a start.

Can you afford increased rent? Well, look at your costs. What happens if you boost the cost of rent? Would anything else change in cost?

Can you afford a kid? Find someone who has an estimate of how much it costs to feed, diaper and clothe a kid. What happens to your budget?

Can you afford savings? Find a substantial cost. Is there any way to reduce it?

What is going on with all that cash? Commit to getting reciepts for every cash transaction for a month. Store them in a special place on your person. Every week balance your "cash book" by recording your reciepts and your cash in/cash out.

After a month, do an in-depth analysis of what cash you started with, what cash you withdrew from the bank, what you ended up with, and what your reciepts where for. (There will be money unaccounted for; this method attempts to bound how much money that is)

How does that compare to your 3-month cash usage history? If it lines up, you have evidence it is typical. Identify expenses you can save by eliminating or replacing.

For something like a Car, you can look at your AAA/CAA/Consumers magazine equivalent, and they have information about total cost of ownership of Cars. Or use federal expense per miles. This avoids under-costing depreciation and maintenance, which is really easy to do.

The goal of budgeting is knowing where your money is, and will be, going, and where it is, and will be, coming from. Once you are aware of that, you can make deliberate decisions to change where your money goes with knowledge of what it changes.

The rules of thumb, like X% on food and rent, are just there to give you an idea if you are doing something ridiculous for your social class.

Calculate your effective income per day (after taxes) and calculate the prize of everything per day.

This lets you easily compare your rent with other (smaller) expenses.

It's easy to say that if you stay below your income every day you will save money.

It also helps to know how much freely spendable money you have each day (money after taxes, rent, bills etc.).

Let the days were your expenses are higher than your income be scarce and know how many days you need to work and save to afford something.

Let an app do it for you, group items and see where you spend your money. One example: https://www.tinkapp.com/en/

Should provide a starting point for showing income vs expenses.

• Maybe I am wrong, but as far as I looked, this app depends on connecting your bank accounts to it, which use BankId -- which seems to work only with Swedish banks. The OP is in UK. – Gnudiff Nov 23 '17 at 12:28
• I googled before posting to verify tinkapp.com/en/tink-launches-in-united-kingdom however might not work anymore – Viktor Mellgren Nov 23 '17 at 16:35
• May exist other similar apps in the UK also. – Viktor Mellgren Nov 23 '17 at 16:36

I think you are asking the wrong question to be honest. Preparing a budget is dependant on so many variables, variables that change dramatically over time and vary greatly by age, region and personal circumstances. Not only that it's very time consuming and may not end up helping in any way. So to make the best use of your time I would encourage you to compile a list of your top 15-20 recurrant expenses and work out a way that you can shrink each and every one of them. For example you and the wife may enjoy a cafe bought coffee every day at work. It takes just minutes to work out an affordable alternative to this that will save you thousands every year