- Personal Finance
Sensible budgeting leads to financial control
Budgeting is a bit like dieting. Just like starting a new diet, the good news is that if you follow reasonably sensible rules you will start to see the desired results immediately. The bad news is, it's for life. You can't just adopt good budgeting practices for a month, or even a year, then drop them and expect to stay on track. If you want to remain in control of your finances, you need to pitch your outgoings at a slightly lower level than your income, forever.
Fortunately, it's not complicated. You can achieve this blissful state of affairs with six straightforward steps and the application of a little discipline.
Step 1 - Know your income
This is easy. Look at your pay check. Multiply it by the number of pay periods in a year (e.g. 12 or 52) to arrive at your annual income after tax and other deductions. Don't forget to include bank interest and investment income, and any other sources of revenue (such as writing at Helium Network). Another simple way is to look at your annual income on your most recent tax return and make any adjustments you know about.
Step 2 - Know your unavoidable expenses
This one is only slightly more complex. Your unavoidable (sometimes called 'non-discretionary') expenses are the cost of goods and services you cannot do without. Food, a roof over your head, reasonable clothing, travel to your workplace and health costs usually fall under this heading.
If you can trust yourself with a credit card (paying off the balance every month to avoid racking up debt), you have a foolproof way to track most of your expenses because they are listed in the regular statements you receive. For those who dislike credit cards, consider using a debit card to make payments with cash you already have: same convenience, same statement, less temptation.
The general idea is that your unavoidable expenses will come in at a total some way below your income. If they don't, you're in trouble. Get a second job, or move to a less expensive neighborhood.
Step 3 - Set your discretionary expenses
Of course, this is the fun part, the reward for all your hard work. You can now decide what to spend on the luxuries you deserve: vacations, regular nights out, electronics, fashionable clothes. The list is as endless as your desires, but your means are limited. Work out what you spent in previous years (back to those plastic card statements again), adjust for inflation, trim the totals here and there if necessary. The aim is to come up with a sum slightly less than the difference between your income and your unavoidable expenses. This will leave you with a margin of savings, however small, that you can put away for the proverbial day when the sun no longer shines.
Step 4 - Track your expenses
Now we come to the tough part. A budget is fine, but you can't just set and forget. If you fix your budget and then forget to look at it for a year, you can hardly expect to have achieved your goals. Set aside half an hour each week to track where your money went (you may need to keep a notepad in your pocket to jot down the cash amounts you pay out when you can't use a card) plus another hour at the end of the month to get it all into a simple spreadsheet. If you don't like spreadsheets, use paper and a calculator.
Compare the actual results with your budget. Don't expect the figures to be the same every month. All budgets go up and down to accommodate things like annual insurance premiums or, more gratifyingly, vacations and an end-of-year bonus. After a year has gone by, you will have a reasonable pattern of month-by-month income and outgoings that you can begin to rely on.
Step 5 - Act quickly to correct problems
You now have the necessary tools at your command to alert you at once if things are going wrong. The annual vacation came in $800 over budget? Don't panic. Trim $100 or $200 off several of your other discretionary items for the next twelve months. Plan a less elaborate vacation for next year. Postpone the purchase of the new TV. All of these options are preferable to long term debt.
Information, discipline and a long term commitment are the keys to successful budgeting. Just like dieting, keep off those extra pounds, and the pennies will take care of themselves.