How do you budget for a £500 weekly income in the U.K.?

This question came from someone on Quora. I respond to a few questions on Quora every month. You can follow me here.

There are two critical assumptions that are not clarified here. 

The first issue relates to geography: are we talking about London or any other town in the United Kingdom? London is significantly more expensive than the rest of the country. 

The second issue is whether the weekly £500 paycheck constitutes gross or net income. Again, a basic rate taxpayer would pay 20% of its income above the personal allowance, which is substantial. 

Budgeting for the sake of budgeting is meaningless. What matters here is identifying how much is left after deducting taxes and other national insurance contributions. 

What is disposable income?

According to the ONS, “disposable income is the amount of money that households have available for spending and saving after direct taxes (such as Income Tax, National Insurance and Council Tax) have been accounted for.”

Disposable income includes earnings from employment but also private pensions and investments as well as other cash benefits provided by the state. 

Therefore, the real question is:

How much disposal income can one expect to have when living with £500 every week before taxes in London and how would a financially responsible person spend such an amount? 

£500 of weekly income amounts to £26,000 each year or approximately £2,166.67 each month.

Earning £26,000 in 2017/2018 and your take home pay is £20,961. This means £1,747 every month. 

Over the year, you will pay £2,898 in income tax and £2,140 in National Insurance contributions. 

With the Chancellor’s reforms announced in his Autumn Budget, for the fiscal year 2018/2018, you can expect to take home £1,755 a month, pay £2,828 in Income Tax and £2,109 in National Insurance contributions. 

Let’s deduct Council tax also. Here, we assume a charge £840 per year. This amount corresponds to the lowest band for Newham Council, which is where the apartment rented in our assumptions is located. This results into a monthly expense of £70.

Therefore, our disposable income is £1,685 a month, with £2,828 in Income Tax, £2,109 in National Insurance contributions and £840 in Council tax.

Based on the most recent ONS data, the UK median disposable household income was £27,300 in the financial year ending 2017, which was up 2.3% on the previous year (after accounting for inflation and household composition).

In our example, we are therefore below the median and mean disposable income in the UK. 

You will not become millionaire but it is still possible to live in London on that income. The real question is whether you can both live in London and contribute to a pension pot, save in an emergency fund and invest? 

A tentative budget in London

I acknowledge that budgets can be very subjective. Note that there are many assumptions in the numbers below. And feel free to disagree or correct me in the comments section! 

Monthly disposal income (starting point): £1,685

Pension contributions: £250 (topped up by 20% by the Government, so a net contribution of £300). 

Rent (studio flat on Springfield Road, East Ham, E6): £600 (you could also find a flat share in a slightly more central location for that amount). 

Travel card: £153.60 (zone 1-3)

Food: £250 (mostly home-cook meals, very limited take-outs)

Internet: £22 (Relish or equivalent)

Electricity SSE: £25

Water bill: £22

Savings: £300

Mobile phone: £15

Miscellaneous: £47

This budget assumes that you have no children and that medical insurance is either covered by the NHS or by your employer. I appreciate that readers may think that the amount dedicated to savings and pension contributions is too high. I disagree. The idea is not to live paycheck to paycheck but to build some capital, no matter how small it is in the beginning. 

10 tips to save money in the UK

It can be difficult to live on budget. To help you, below are 10 tips to save money. 

1. Stop smoking: seriously, it’s a very expensive habit. One packet of cigarettes costs approximately £10. According to the NHS, if you smoke an average of 5 cigarettes each day, this will cost you £912.50 per year. Also, that is only the immediate cost. In addition, if you factor the increased chances of getting a severe disease such as lung cancer, then there is no limit as to medical costs and expenses.
2. Buy return tickets: if you are taking the train to go somewhere, always buy a return ticket as it will be less expensive than buying two one-way tickets. I’m thinking about people who take the (rather expensive) Gatwick Express or Heathrow Express. 
3. Pack your lunch: it’s a well-known hack and yet nobody does it. True, there is tremeduous social pressure to follow colleagues and mimic behaviors to fit in the workplace. This comes at a cost. Unless you think you can get back your money in the form a pay increase or promotion, it’s probably not worth it. I’m always shocked that a burrito at Chilango costs £10 (yes, I add guacamole). I almost never go there now because £10 for a single burrito without drinks or a dessert is simply too expensive. 
4. Walk or use the bus: the tube is the fastest means of transportation in London. But a single ticket can cost up to £4.90! Walking or taking the bus is cheaper. Avoid paper travel cards at all costs.
5. Shop online: if you shop on Ocado, you can collect coupons and benefit from a price match guarantee. It ends up being cheaper if you avoid branded food and it saves time. If you still want to go to a store, opt for Tesco instead of Sainsbury’s or Waitrose. Always bring your own bags. 
6. Buy everything at once and in bulk: buy in bulk as it is cheaper per item. Avoid paying in installments whenever you can: it usually ends up being more expensive than paying everything at once. 
7. Manage your coffee habits: I’m addicted to coffee and I find it difficult to function without it. But it’s an expensive habit. A cappucino at Taylor St Baristas will cost you £3.50! Aim to go to coffee shops that give you a discount if you bring a reusable cup such as Pret or Patisserie Valerie (50p off at pixel time). 
8. Get cheap tickets: in Leicester Square, ticket booth TKTS sells returned tickets for West End shows today, tomorrow and the next day for a discount. If you really want to see Hamilton, then wait a bit or enter the lottery to grab a cheap ticket. 
9. Be careful with bank fees: I was charged over £100 by HSBC this week for a non-sterling transaction fee when booking flight tickets in Euros. I’m still fuming. No foreign transaction fee credit cards are harder to come by in the UK compared to the US. But they exist (check out Nationwide or Santander). 
10. Save on your mobile deal: with Wifi readily available in London and other majors cities, there is no reason to pay the extra money for that 30GB data. Stick to the minimum data pack to reduce your phone bill. Turn on all data caps and any settings allowing you to make or receive phone calls from non-EU countries. For those that are on a monthly subscription, this could amount to a nasty bill without prior notice. 

Conclusion

Living in the UK, and especially in London, is expensive. I appreciate that I often discuss topics that involve making significant investments. It can be hard for some readers to relate. 

Here’s what I want you to know. Yes, collecting coupons and saving on food can be ways to increase your savings. But you need to think further along. Be more ambitious. You need to realize that those savings are not meant to stay in cash and must then converted into investments to make you more money.

Saving is only step 1. It is not an end in itself. If the objective is to live comfortably and be financially secured, then increasing your income is the key. For some of you, this will be harder to achieve. But it’s not impossible at all. It’s been done before.