One of life’s great mysteries is why even the most capable and intelligent people seem to hit a mental block when it comes to budgeting their personal finances. This simple guide will help you manage your money more effectively.
Why Money Matters
Perhaps many of us have an aversion to home budgeting because poring over financial statements isn’t the most exciting of activities. One way to get motivated is by reminding yourself of the importance of money.
Money equates to freedom and choice. Without money our precious time is spent chasing our tail just to keep a roof over our head and food on the table. With money we have much more liberty in how we live and how we spend our time. Accumulating wealth isn’t a sin. With money comes the power to do much good. With money, we have choice; without it, we don’t!
The Importance of Budgeting
The acquisition of wealth depends upon two things, our total income and outgoings. The more income exceeds outgoings the faster we accumulate wealth, ie to build wealth we need to maximize income and minimize expenditure. The management of these two quantities is what’s known as budgeting.
The most important, and often most difficult step in budgeting is taking stock of what’s happening. Most of us pick up our pay packet, spend it, and wonder why nothing’s left before the next payday arrives, and so on…
Keep a check on your income and outgoings for a month. Carry a pocketbook and note every bit of income and expenditure from the morning newspaper to the tips you might get from your work. Look closely at your bank statement and remember to include those possibly forgotten direct payments or stock dividends. Remember also to account for periodical expenses such as local taxes, house insurance, car service etc.
Once you have the figures, look first at your income. Before analyzing your expenses, work out ideally how you’d allocate that income. Start by itemizing essential costs, eg housing, transportation, food, bills, taxes… With what’s left, work out ideally what you’d like to spend (on nice, but discretionary things like holidays, eating out… ) and save. Don’t forget the small stuff like coffees and newspapers.
Now look at your expenses. How do they differ from the ideal picture? The differences suggest potential changes; the greater the difference, the greater the need for change.
Scrutinize those expenses carefully. Are there any areas where you might be wasting money? These might be as simple as buying a coffee on your way to work instead of waiting for the free one you can get there. What may seem only a few dollars a week can equate to hundreds of dollars over the year.
You don’t have to forego all life’s pleasures, but it’s surprising how little things add up. By analyzing your records you will at least be aware what your little pleasures cost.
Hopefully at the end of the exercise you’ll find that your income exceeds your expenditure. In this case you’ll have the pleasure of deciding how to allocate the excess to best suit your circumstances, goals and personality.
If, however, you find that your outgoings exceed your income you must acknowledge that your position is unsustainable. Feel relieved that you’ve at least recognized the problem. There are two basic ways to fix matters, either increase your income or decrease your expenditure to the point where you’re no longer running a deficit.
On the income side, are there opportunities to work overtime, or to earn some part-time income? In terms of expenditure you’ll need to be ruthless. Prioritize the outgoings you’ve listed. Spend less where you can.
If you’re having trouble servicing debt, acknowledge the problem. Talk to your creditors.
Weekly vs. Monthly Budgeting
These days most of us get paid monthly. While this benefits employers (making only 12 payments a year instead of 52) it can create difficulties for individuals. Not only are calendar months of unequal length, but a month is also a long time to account for.
It’s much easier to budget by converting your monthly income into weekly chunks, and making each available on a particular day each week. To calculate the weekly equivalent of your monthly salary you need to multiply by 12 and divide by 52.1775 (taking account of leap years). In months with only 4 “pay days” you’ll need to set something aside for those with 5.
Before bank accounts became commonplace many people used to set aside money, maybe in labeled envelopes or jars, for their various outgoings. Though primitive, this method made it obvious whether life’s expenses had sufficient funding. Now we rarely get to see physical cash it can be hard to see the overall picture.
Even if your money’s held securely in a high interest deposit account you can still follow the envelope budgeting principle by mentally allocating the balance to different accounts, eg using a computer spreadsheet.
Make a list of your periodical outgoings, and work out how much each week/month is needed to cover them. Then, on computer or paper, split your deposit account balance into an appropriate number of virtual sub-accounts, ensuring each has sufficient funding.
As well as predictable expenses life sometimes presents unpleasant surprises such as a lost job, leaking roof or major car repair. You can never completely account for the unexpected, but it makes sense to hold a financial contingency fund to at least minimize the financial damage. The size of this fund depends upon your circumstances, and personality, but it’s often advisable to hold at least 3 month’s salary in readily available cash.
Following this simple budgeting guide will allow you to take control of your financial destiny.