by Louise Upton
Countries do it, governments do it, corporations do it, big and small businesses do it, your local corner store and sports club do it and even your neighbours could be doing it. So, why aren’t you doing it – planning and keeping a budget?
What is a budget: The word budget, according to a number of sources including Wikipedia, is derived from “the old French word bougette, purse”. A budget lists all the money coming in (income) and all the money going out (bills, life and lifestyle expenses). A budget is your personal record of what and where you are saving and spending. A budget changes as your circumstances change and is only as good as the data you enter into it and your ability to keep it up-to-date.
What does a budget allow a person/household to do: A personal budget allows you to decide how, where and what you save and spend. With a budget you can track your income and expenses and see where you’re spending more than you should be, or spending unwisely. Knowing how you spend your money allows you to see where you can make changes to save money and ensure your personal financial future.
What makes personal budgeting difficult: It can seem tedious and no one enjoys admin. It’s very easy to put it on the backburner because it’s easy to think you can live without it. Budgeting has negative connotations for many people, such as stopping you having a good time or being too scary to contemplate. To avoid the pitfalls of procrastination keep these thoughts in mind when you approach budgeting.
It’s personal. It’s about you and your needs.
Have a purpose and a time frame.
Follow the KISS principle: Keep It Simple Stupid. The more complicated you make the process; the less likely you’ll keep it up. For example: lump spending into general categories such as car, household items, etc, rather than being too detailed.
Be flexible. Expect your budget to change from month to month. If you find you’re spending more in an area and it is necessary, think about why it is happening and what you could change, and/or where you could make savings in other areas to compensate.
Don’t let budget blowouts put you off, try and anticipate them and modify other areas to cope.
Use tools you like: pencil and paper; spreadsheet software; money-management software; money-management websites, spending-management software (Zero Budget)
3 steps to building your budget
1. Ask yourself, where are you now? The answer will help you determine your personal net worth. You will need to look at your wages/salary/income (any income from investments or extra regular jobs) for the past four months. Add the total net pay (the pay after tax has come out) and divide by four to get your average income per month. Write that number in the income column.
2. Use the same formula to determine your monthly expenses/outgoings. Get together your past four months of bills, credit card statements, and any other expenses (including yearly costs) you have. Put them into general categories: utilities, mortgage, rent, private healthcare, telephone/internet, car, childcare/school, food, clothes, lifestyle, etc, etc. Add them up and divide by four. For any yearly expenses divide by 12 and add to the average already determined. Write the total number down in the second column called expenses. (As more expenses come to light you will find this average monthly number changing)
3. The moment of truth. Take your total expenses away from your total income. If you’re left with a negative: your expenses are greater then your income, there’s work to do.
In the case of periodic expenses, for example car registration and green slips. Most people divide these expenses by 12 and think they’ll save that amount each month. It’s not going to happen when you’re first staring out and you’ll probably not have a full year up your sleeve anyway. Instead take each expense, count how many months away it is, and divide the total payment amount by the number of months and budget to save that a month for the payments.
Examine your expenses and decide what you can do without or spend less on. Your budget will help you put money to better use and let you see where you can save.
Your budget helps you prioritize expenses and debts to be paid first. Write your payments on your budget so you can track your spending.
As your budget evolves use it in your financial plan to assess savings accounts, retirement plans, and see how investments and insurance/protection can be managed through it.
Your first budget will be a first draft. It takes time, a few months, before the process will really begin to come together but the results if you look and act straight away will be immediate.
The most important step to making a personal budget is to get started. Procrastinating means you’re paying everyone other than yourself. Take control of your money with your budget.
Got any Budgeting Tips?
We’d love to hear from you and how you manage a budget. Drop a comment to www.davidsoninstitute.com.au
(For example, how do contract workers/freelancers budget successfully when their income is often not fixed?)