In 2011, the Office for National Statistics (ONS) held a national debate on measuring national well-being to help identify what matters most to people in the United Kingdom. Although results varied, 45 percent of participants stressed the importance of having adequate income or wealth to cover basic needs.
But as important as covering basic needs is, 15 percent of people also reported that they’re having a difficult time managing their finances. Another 26 percent are just getting by. And so, the question presents itself: how can people better manage their spending to improve their financial standing?
To get the answer, we must first identify the most common types of households in the UK.
Households in the UK
So what exactly is a household? According to the ONS, “a household is defined as a person living alone or a group of people who live and eat together.” In 2011, there were 25.5 million households in Great Britain, with the average size being 2.4 persons.
In the third installment of a series that focuses on family and household formation, the ONS identified the most common types of households as being:
- One person
- Couple with no children
- Couple with 1 – 2 dependent children
- Lone parent with dependent children
- Couple with non-dependent children only
Dependent children are those living with their parent(s) under the age of 16, and non-dependent children are those living with their parents aged 19 or over. One person households made up 29 percent of the total households in Great Britain in 2011, while couple households with no children followed closely behind at 28 percent.
In 2010-2011, the average household spent £473.60 per week, which can be broken down into percentages by the 12 Classification of Individual Consumption by Purpose (COICOP) categories:
- Transport – 13.7 percent
- Housing, fuel and power – 12.75 percent
- Recreation and culture – 12.26 percent
- Food and non-alcoholic drinks – 11.23 percent
- Restaurants and hotels – 8.27 percent
- Miscellaneous goods and services – 7.58 percent
- Household goods and services – 6.63 percent
- Clothing and footwear – 4.94 percent
- Communication – 2.74 percent
- Alcoholic drinks, tobacco and narcotics – 2.49 percent
- Education – 2.11 percent
- Health –1.05 percent
- Other expenditure items – 14.21 percent
In light of reports that Britons are having a difficult time managing their finances or are just getting by, some households should reexamine their budgets and change their spending habits to better manage their finances.
So what’s the easiest way for a household to do so? It all comes down to what your money is spent on. Dave Ramsey, a financial author, television personality and motivational speaker, is a four-time New York Times bestseller whose books focus on encouraging people to get out of debt. Based on net income, his Gazelle Budget recommends households spend the following percentages each month: 10 – 15 percent on charitable gifts, 5 – 10 percent on savings, 25 – 35 percent on housing, 5 – 10 percent on utilities, 5 – 15 percent on food, 10 – 15 percent on transportation, 2 – 7 percent on clothing, 5 – 10 percent on medical/health, 5 – 10 percent on personal, 5 – 10 percent on recreation and 5 – 10 percent on debts.
There are also hundreds of consumer credit counseling services (CCCS) that offer debt management assistance in the form of budget counseling. While these numbers may vary by organisation, the typical recommended budget breakdown by CCCS is as follows: 20 – 30 percent on housing, 4 – 7 percent on utilities, 15 – 20 percent on food, 6 – 20 percent on transportation, 2 – 8 percent on medical, 2 – 4 percent on clothing, 5 – 10 percent on investments/savings, 15 – 20 percent on debt payments and 5 – 10 percent on miscellaneous items.
Side by side, Ramsey’s recommended percentages and the standard CCCS percentages are very similar. Both suggest households should spend the majority of their income on needs and not wants, particularly housing, food and transportation.
Changing Spending Habits
In the 2012 Minimum Income Standard (MIS) for the United Kingdom, a couple with two children spent an average of £679.37 per week as of April 2012, excluding rent and childcare. A single parent with one child spent an average of £297.90 per week, also excluding rent and childcare. Let’s take a closer look at the percentage breakdowns:
Couple with two children
- Transport – 17.79 percent
- Housing, fuel and power – 13.81 percent
- Recreation and culture – 17.57 percent
- Food and non-alcoholic drinks – 19.29 percent
- Miscellaneous goods and services – 4.49 percent
- Household goods and services – 17.60 percent
- Clothing and footwear – 5.98 percent
- Alcoholic drinks, tobacco and narcotics – 3.43 percent
Single parent with one child
- Transport – 12.5 percent
- Housing, fuel and power – 19.64 percent
- Recreation and culture – 13.54 percent
- Food and non-alcoholic drinks – 20.51 percent
- Miscellaneous goods and services – 4.87 percent
- Household goods and services – 18.32 percent
- Clothing and footwear – 6.33 percent
- Alcoholic drinks, tobacco and narcotics – 4.26 percent
According to Ramsey’s Gazelle Budget and the typical CCCS budget, both households are spending more than the recommended allotments for each expense.
If your household finds itself in a similar position, there are things you can do to help improve your financial standing. To start, set a weekly budget for each expense and stick to it. Begin with Ramsey’s Gazelle Budget or the typical CCCS budget and tweak the percentages to your liking. After a few weeks, sit down and review your finances again. If you’re meeting your weekly budget, but are still feeling financially overwhelmed, don’t worry — just decreases your allotments by a few percentages.
Here are a few other tips to help you manage your spending:
- Make a list. If you’re spending too much at the supermarket, make a shopping list beforehand. By getting only the items you need, you won’t succumb to impulse buys.
- Use public transportation. Are petrol prices taking a toll on your wallet? Save some quid by carpooling, taking the bus or riding the tube to work.
- Turn it down. If your monthly heating bill is too much, turn down your thermostat when you leave home. On average, you can save about three percent on your bill for every degree that you turn down your thermostat.
- Stay at home. Thinking about going out to a movie or a fancy restaurant? Save yourself some money by renting a movie or cooking a meal at home. Sometimes, staying in is more fun than going out.
- Just say no. Smoking can have a negative influence on your health and wallet, especially since the average price of a pack is about £7.46. Try cigarette substitutes like mints, toothpicks and coffee stirrers to help you quit easier.
Keep in mind that these tips are simply suggestions on how to better manage your finances. Ultimately, the decision to spend comes down to you and in order to have enough money to cover basic needs, you must be able to make savvy spending decisions.