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Functional Skills Level 2 — Money & Finance

Money Calculations and Budgeting

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Real-World Applications

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What Is a Budget?

A budget lists all your income (money coming in) and all your expenditure (money going out), then finds the balance by subtracting expenditure from income. If income is greater than expenditure, you have a surplus — money left over. If expenditure is greater than income, you have a deficit, meaning you are overspending.

Balance = Total Income − Total Expenditure. Surplus: balance > 0. Deficit: balance < 0.
Monthly Budget — Income and Expenditure INCOME Amount (£) Salary (after tax) 1,800 Child benefit 80 Total Income 1,880 EXPENDITURE Rent 650 Food & groceries 320 Travel 180 Total Expenditure 1,150 Balance (Surplus) = £1,880 − £1,150 = £730 Surplus vs Deficit SURPLUS Income > Expenditure Balance is positive Money left over ✓ e.g. Income £1,880 − Exp £1,150 = +£730 DEFICIT Expenditure > Income Balance is negative Overspending ✗ e.g. Income £1,200 − Exp £1,400 = −£200

Example 1 — Calculating monthly budget balance

Income: Salary £1,600, Benefits £120. Expenditure: Rent £700, Food £280, Utilities £90, Travel £150.

Step 1
Total income = £1,600 + £120 = £1,720
Step 2
Total expenditure = £700 + £280 + £90 + £150 = £1,220
Step 3
Balance = £1,720 − £1,220 = +£500 surplus. Income exceeds expenditure — there is money left over.

Example 2 — Identifying a deficit

Income: £950. Expenditure: Rent £600, Food £200, Phone £30, Entertainment £200.

Step 1
Total expenditure = £600 + £200 + £30 + £200 = £1,030
Step 2
Balance = £950 − £1,030 = −£80 deficit. This person is overspending by £80 per month.
Step 3
To eliminate the deficit, they need to either increase income or reduce expenditure by at least £80.
Key terms: Income = money received (salary, benefits, rent from tenants). Expenditure = money spent (bills, food, travel, leisure). Balance = Income − Expenditure.

✓ Quick Check 1 — Budgets, surplus, and deficit

Question 1 of 10

Hire Purchase — Comparing Total Cost with Cash Price

Hire purchase (HP) allows you to buy an item by paying a deposit upfront, then making regular monthly payments. The total HP cost = deposit + (monthly payment × number of months). This is almost always more expensive than paying the cash price outright.

Total HP cost = Deposit + (Monthly payment × Number of months)
Extra cost = Total HP cost − Cash price
TV — Cash Price vs Hire Purchase CASH PRICE £500 Pay once. No extra cost. ✓ Cheapest option Requires £500 available upfront HIRE PURCHASE £80 deposit + 12 × £40/month = £80 + £480 = £560 ✗ £60 more than cash Extra cost: £60 HP total (£560) − Cash (£500) = £60

Example 3 — Comparing HP and cash price

A washing machine costs £420 cash. HP: £60 deposit + 18 monthly payments of £25.

Step 1
Calculate total of monthly payments: 18 × £25 = £450
Step 2
Total HP cost = £60 + £450 = £510
Step 3
Extra cost of HP = £510 − £420 = £90 more than buying for cash.
Step 4
Conclusion: HP costs £90 more, but allows the buyer to spread the cost over 18 months without needing £420 upfront.

Example 4 — Finding the monthly HP payment

A sofa costs £360 cash. HP: £60 deposit, 12 monthly payments. Total HP cost = £420. Find each monthly payment.

Step 1
Amount paid in monthly payments = Total HP − Deposit = £420 − £60 = £360
Step 2
Monthly payment = £360 ÷ 12 = £30 per month
⚠ Common mistake: do not forget to add the deposit to the monthly payments. The total HP cost = deposit + all monthly payments combined, not just the monthly payments.

✓ Quick Check 2 — Hire purchase calculations

Question 1 of 10
Working out profit and loss as a percentage is covered in Lesson 5.7 — Percentage Change.

Practice: Budget and HP Calculations

Work through these real-life money problems.

#QuestionAnswerResult
1Income: £1,650. Expenditure: Rent £700, Food £310, Travel £95, Entertainment £120. What is the monthly balance? (£)
2Is this a surplus or a deficit? (type surplus or deficit)
3Sofa HP: £120 deposit + 24 monthly payments of £22. What is the total HP cost? (£)
4The sofa's cash price is £600. How much extra does HP cost? (£)
5Income: £1,200. Expenditure: Rent £550, Food £220, Travel £70, Other £180. What is the monthly balance? (£)
6Is this a surplus or a deficit? (type surplus or deficit)
7TV HP: £50 deposit + 12 monthly payments of £35. What is the total HP cost? (£)
8The TV's cash price is £400. How much extra does HP cost? (£)
9Income £900, Expenditure £950. What is the deficit amount? (£)
10Bike HP: £30 deposit + 10 monthly payments of £18. What is the total HP cost? (£)

⚠ Things to Watch Out For

  • Confusing surplus and deficit: Surplus = income > expenditure (money left over). Deficit = expenditure > income (spending more than earned). A deficit is negative — you are overspending.
  • Hire purchase — not adding up all payments: Total HP cost = deposit + (monthly payment × number of months). Students often forget the deposit when calculating the total.
  • Comparing HP vs cash incorrectly: Extra cost of HP = total HP cost − cash price. Make sure you have the right total HP cost (including deposit) before subtracting.
  • Budget — missing irregular expenses: Annual or one-off costs (e.g. car insurance, MOT) should be divided by 12 to find the monthly equivalent when building a monthly budget.
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