Before you borrow money, make sure you can afford the monthly repayments on top of your current outgoings. Knowing exactly what money is coming in and going out each month will help you work out whether you can afford to borrow.

Draw up a budget

The only way to work out whether you can afford to take on new borrowing is to put together a household budget. This will show you if you have any money left over at the end of the month for the repayments, when you’ve paid all your bills and living expenses.

What to include in your budget

It’s easy to miss expenses off a budget, especially if many of your bills go out by Direct Debit. Here are some costs to consider.

Home:

• Gas
• Electricity
• Council Tax
• Water
• TV Licence
• Mortgage or rent
• Home and contents insurance
• Telephone, mobile and internet service.

Existing credit commitments:

• Loan repayments
• Credit and/or store card repayments
• Hire purchase or in-store credit agreement repayments (for example, for furniture or a TV).

Travel:

• Fuel
• Car tax
• Car insurance
• Vehicle maintenance
• Car finance repayments
• Other transport, such as train or bus tickets.

Essentials:

• Clothing
• Food shopping
• Toiletries and cleaning products.

Other costs

• Pension contributions
• Life insurance premiums
• Other insurance, such as critical illness or income protection cover.

Children:

• Clothing
• School trips
• Childcare costs
• Maintenance payments
• Private tuition/schooling.

Entertainment:

• Holidays
• Hobbies
• Eating out
• Hairdressers
• Lottery tickets
• Gym membership
• TV subscriptions (such as Sky)
• Trips out (for example, to the cinema or events)
• Magazine and newspaper subscriptions/purchases
• Drinks outside the home (including coffees and alcohol).

Of course, every household has different bills, so it's important to not treat this as a complete list. Think about any extra costs you or your family might have to pay.

It’s a good idea to gather bank account and credit card statements from the last three months and record everything you spend over a period of a month or longer (as you might have some bills taken every six or twelve months).

Make sure you include everything you spend to get a true picture and add a bit extra to allow for inflation and any unexpected costs.

When you know:

• exactly how much money you spend in any one month, and
• how much you need to put aside as a cushion or to save
• you’ll be able to see whether you can afford to take on any new borrowing.

Review your financial commitments

If meeting monthly repayments is hard or you have lots of different loans and cards, it’s a good idea to review your borrowing commitments and see if you can reduce these rather than taking on more. Whatever you do, don’t take on more credit to pay off what you already owe.

Only just making ends meet?

If your budget shows you have little or nothing to spare to make your repayments, you can’t afford to borrow. It can be worrying to realise you’re only just coping with your current financial commitments, but don’t ignore the problem.

Struggling with financial difficulties?

If you can’t manage, contact one of the free debt advice charities for help.