Managing living costs in the UK, updated for 2013/2014. How much should you put into savings?

I have been living in the UK for over 46 years now and I can say that most people have trouble managing their money. I saw a large number of individuals in a full-time employment living from salary to salary, never paying off credit card debts and spending a chunk of money on alcohol, takeaways and things they do not really need. They are always ‘skint’ and cannot afford to go on nice holidays and have no idea what they are going to do (in terms of money) in the future. I understand everyone who does not make enough income, but those who do, should start managing their money as soon as possible.
I will give you a simple but very powerful budget example which I personally happily use for just under a year 3 years and which should work with over 80% of UK population. I do not like the word “budget” so let’s just call it “money management technique” which allows you to enjoy things you really like and gives you peace of mind in the future (or even makes you rich at the end).

Suggested money allocation

* Calculate all your fixed costs. This is something you will be paying every month and there is NO WAY you can avoid it: rent, utility bills, your mobile phone contract, bus pass, council tax, TV license, water charges, phone line, broadband per month and other as applicable. In addition, add your Food cost per month including food at home and food at work as there is NO WAY you can survive without food all month (unless you are a farmer and you eat only what you grow).

Fixed living costs in the UK, updated for year 2013/2014

Example (per person per year, based on 2 people sharing):

• Rent (average £325 per person per month (£500 for London!): £3900
• Average council tax amount (Band D): £1,300/2 = £650 (Remember – students and some other exempt people do not pay this)
• Water + Sewerage charges (avg.): £400/2 = £200
• Food (average £35ppp/w (This is decent meals): £1,820
• Utility bills (average £80 per month for gas and electricity, more down south, much less up north. Avoid renting houses with electric heating or your bill will be double!!!): £960/2 = £480
• Mobile phone bill (average £25p/m, to save get GiffGaff’s 10/month deal!): £300
• Bus pass (average £60 per month (£50 northern UK, £70 South)): £720
• TV license: £146/2 = £73
• Broadband + phone line £30: £360/2 = £180

Total: £8,323 per person per year or around £694 per month.

I live up north and my fixed costs are around £610 per month + gym membership + lunches at work (around £3 per day) + contact lenses come at around £725 per month, however, if I lived in London I would expect this figure to be around £1000 as rent, utility bills and travel are way more expensive. I personally do not have any more fixed costs, but do not forget to add stuff like Sky TV, magazine subscriptions, all types of insurance etc.

** 20% of your salary should go into savings. 10% should go into high-interest savings account which “locks” your money away for a fixed term like 3-5 years like ISA.
Other 10% should be transferred into your easy-access savings account where you could withdraw your money anytime if you had an emergency. I personally suggest you transfer ALL 20% to your easy access savings account until you accumulate amount enough to survive for AT LEAST 3 months (your fixed costs x 3). In my case I have to accumulate £725 x 3 = £2175 BEFORE starting to allocate 10% to my long-term savings account. Sometimes bad things happen (redundancies, health problems etc.) you must have money saved so you have time to sort things out.

*** Guilt free money is money which you can spend on whatever you wish – new shoes, restaurants or even alcohol – it does not matter as this is the money you can spend for yourself without feeling guilty as you are saving enough already. It should be around 20-30% of your salary.

What if I you do not earn enough?

Minimum Full-time salary in the UK is:
The main rate for workers aged 21 and over: £6.31 p/h (1 October 2013)
Standard Full-time job is around 35-40 hours a week. 52 weeks x 35 hours a week x £6.31 per hour = £11,484.20 salary per year.
After tax and NI contributions it is: £10,627.02 per year or £885.58 per month.

Let’s say you get a minimum £885 a month salary. As I mentioned max 60% should go to Fixed costs, in this case it equals to £530 a month. It is much less than UK average of £694, but many savings can be made to slash it down:

• Rent a house with more people in that case your rent and utility bills and council tax will go down as your bills will be split between more people.
• Cook at home and buy cheaper products (look for the value range).
• Use pay as you go mobile – in that way you will be able to control your bills.
• Walk or cycle if you can instead of using public transport.
• Make sure you have the best deals on broadband and phone line and gas and electricity.

You should still aim to save 20% of your salary which would be around £175 if you get minimum salary. You would also get the same amount left to spend on whatever you wish, but remember new clothes and night-outs are included in this amount as well!

Where do you spend your savings money?

Your short-term savings money should go for the particular reason. For example: holidays, car, wedding, or initial mortgage payment.
Your long-term savings money should be kept as long as possible and you should save that for things like: children’s education, new house or even retirement.

What if you are a student or just part-time employed?

My example budget technique is oriented to everyone on full-time employment so if you are a student or just part-time employed I do not expect you to have any spare money to save. If you manage to – well done! If you cannot, just make sure you do everything to keep your fixed-costs as low as possible since it is so easy to get carried away. If you are wondering how much it costs to live in the UK as a student, I can give you a rough breakdown:

Example cost of living for student in the UK (per person per year, based on 5 students sharing):

• Rent (average £280 per person per month. Halls of Residence in Universities include all bills in the price, but they are still MORE expensive than renting privately!): £3,360
• Council tax: £0 (If all of the house occupants are students)
• Water + Sewerage charges (avg.): £400/5 = £80
• Food (average £20ppp/w): £1040
• Utility bills (average £120 per month for gas and electricity, more down south, much less up north): £1440/5 = £288
• Mobile phone bill (average £10p/m on pay as you go): £120
• TV licence: £146/5 = £29
• Broadband + phone line (£30 a moth): £360/5 = £72

Total: £4,989 per person per year or around £416 per month.
+ books, clothes, booze etc.