How to budget during a cost of living crisis

Most people are familiar with some form of budgeting. Creating a household budget is a useful, everyday way to keep track of income and expenses. However, when the cost of living rises sharply, budgeting becomes more challenging. 

For many people, particularly those on low incomes, budgeting during a cost of living crisis becomes a delicate balancing act. There is often a need to redistribute household income to areas hit hardest by inflation, such as energy bills. At the same time, you may have to cut spending on certain household items which could be subject to greater price increases, such as luxury food items.

In this article, we will explore why budgeting is important and detail some different budgeting strategies. These can help you manage your money well, even during times of hardship and uncertainty. 

What is a cost of living crisis?

A cost of living crisis occurs when the cost of basic goods and services increases faster than people's incomes. This causes people's standard of living to go down. At its worst, a cost of living crisis can affect an individual’s ability to afford basic necessities. 

How to budget: The importance of budgeting for everybody

Budgeting is a crucial activity for everyone. However, it's especially important for those on low incomes during a cost of living crisis. Budgeting allows you to track your spending and prioritise your expenses. 

By doing so, you can make sure that you're equipped to cover the essentials, such as rent, food, and utilities. At the same time, it allows you to cut back on unnecessary expenses. Anyone can draw up a simple budget - either for themselves or their household. 

Start with your income

The first step to managing your budget is totalling how much money you have coming in. If you have a regular income, such as a salary, it's easy to determine your income.

However, if you have an irregular income, such as from freelancing or a small business, it can be more challenging. In this case, you may need to estimate your income as accurately as possible.

List your expenses

The next step when it comes to how to budget is to list your expenses. This includes fixed expenses, such as rent and utilities. It also includes variable expenses, like groceries and entertainment. 

Be sure to include all your expenses, even small ones, to get an accurate picture of your spending. It may be helpful to repeat this process every pay cycle to properly understand where your money is being spent.

Need a helping hand with how to budget your money? Our helpful budget planner makes it easy to track income and expenditure.

Prioritise your expenses

Once you have a list of your expenses, the next step is to prioritise them. It’s important to start by paying for the essentials, such as rent, utility bills and food. After that, set money aside for other important expenses. For example, things like healthcare and transport. 

Finally, allocate money for non-essential expenses, such as entertainment and eating out. Take a look at the 50/20/30 Rule below to learn more about how to effectively prioritise your expenses.

Cut back on unnecessary outgoings

During a cost of living crisis, it's very important to cut back on the expenses you don’t need. To do this, look for ways to save money on a regular basis, such as cooking at home instead of eating out. 

Also, consider using public transportation instead of driving and cancelling subscriptions you no longer need.

Next, let's look at some examples of real budgeting strategies in action.

The 50/20/30 Rule

The 50/20/30 rule is a popular and easy-to-use budgeting strategy. This rule suggests that you divide your after-tax income into three groups:

• 50% for Needs: This includes everyday spending essentials such as housing, utilities, food, transport, and other basic necessities.

• 20% for Savings and Debt Reduction: This includes any money you set aside for savings and paying off debt. Credit card debt, student loans, pension contributions and car loans fall into this category.

• 30% for Wants: This category includes non-essential expenses such as eating out, entertainment, travel, and hobbies.

The idea behind the 50/20/30 rule is that it provides a simple, long-term guide for allocating income effectively. At the same time, it still allows for flexibility based on individual circumstances. 

For example, if your essential expenses exceed 50% of your income, you may need to adjust the percentages for the other categories. Also, if you have a high level of debt, you may need to allocate more than 20% of your income towards debt reduction.

Overall, the 50/20/30 rule can be a helpful starting point for people who want to get a better handle on their finances. However, it's important to remember that it's just one of many ways that guide how to budget.

The Envelope Method

The envelope method is a simple budget rule. This method consists of putting cash into envelopes for your expenses. For example, you might have separate envelopes for rent, groceries, and entertainment. 

Once you have used the cash in an envelope, you can't spend any more money on that expense until the next payday.

Here's how to budget with the envelope method:

• Assess your income and expenses.

• Put aside cash for each expense and put it in an envelope.

• Only spend money from the correct envelope for that expense.

• At the end of a pay period, any leftover cash can be carried over or put into savings.

Zero-Based Budgeting

Zero-based budgeting is a type of budget plan where you put all your income for the pay period into different expenses and savings categories. The goal is to have no unallocated money left over at the end of the pay period.

Here's how to budget with zero-based budgeting:

• Allocate all your income to different categories, such as rent, groceries, utilities and savings.

• Ensure that your expenses and savings add up to your income.

• If you have any leftover money, allocate it to savings or use it to pay off debt.

The 80/20 Rule

This budgeting method is particularly useful for people whose essential expenses account for a lot of their pay cheque. At the same time, the budget ensures you still have some money left over for discretionary spending.

Here's how to budget your money with the 80/20 rule:

• Put 80% of your income toward necessities, such as paying off debt, rent, utilities, and food.

• Put 20% of your income into non-essential expenses, such as entertainment and dining out.

• Adjust your budget if needed to ensure that your expenses and savings add up to your income.

Pros and cons of different budgeting approaches

Other tips for how to budget during a cost of living crisis

Look for ways to increase income

Consider ways to supplement your income. This includes things such as taking on a part-time job, selling items you no longer need, or starting a small business. Every little bit can help when trying to make ends meet.

Avoid high-interest debt

Taking on high-interest debt can quickly spiral out of control and make it difficult to keep up with expenses. 

Think very carefully about the potential implications before taking on payday loans, high-interest credit cards, and other sources of expensive debt which can quickly spiral out of control.

Keep an eye on your credit score

While making regular account payments during a cost of living crisis can be challenging, it remains important to be diligent. To ensure you have access to credit if you need it and avoid overly high-interest rates, you might want to consider keeping an eye on your credit score.

Use cash as much as possible

Some people find it easier to stick to a budget when using cash instead of credit or debit cards. If this sounds like you, it might be worth withdrawing a set amount of cash each week or month to use for expenses. 

This way, you can avoid using cards for discretionary spending. Naturally, you should only do so if you can get by purchasing goods and services using cash.

Keep your food bill in check

To save money on food, shop seasonally, plan meals in advance and cook at home as much as possible. You can often make significant savings by buying necessities in bulk shopping at discount stores. Also, think about using coupons where possible and buying supermarket own brand products.

Budgeting well during a cost of living crisis can be challenging, but it is possible. Choosing a budgeting model that plays to your strengths will help you regain control of your finances now and into the future. 

If you’re good at organisation, you may find the zero-based budgeting method works best for you. If you prefer simplicity, the envelopes model may be a better fit for your needs.

However you choose to proceed, the most important rule is to ensure you budget enough to cover your essentials. And at least one of the methods described here will help you achieve that goal.

This article was written on 9 November 2023; all information was correct at the time of writing