Learning about budgeting and how it can help your personal financial life makes every aspect of your life easier and helps to give peace of mind. Most people, however, do not budget and have a hard time grasping the concept of why this might be important to them.
What is a Budget?
A budget is a spending plan that includes everything that you will spend money on. A good budget is one that includes all of your expenses and allows you to stay within your income. A great budget includes all of your spending and allows you to save for a rainy day and eventually invest some of that money, too, and still stays within your income. There is no reason why any person (or family) should not be able to stay within their personal home budget. One thing to be aware of is that no matter how detailed your spending plan is, if it doesn’t include everything that you will spend money on, and does not address where you will get the money to cover your expenses, then it isn’t a budget.
Isn’t a Budget Just a Pain to Do?
Well, it does take some time and a little bit of discipline at first. But without it, you really can’t track where you are spending your money, you will lose control of your expenses and not even be able to figure out where the money went. And to make matters worse, you may end up having problems figuring our where to get the money to cover a big expense that you forgot about. So which is the bigger pain, taking a little bit of time to do a proper budget or to have the financial headaches that come from not doing one?
How to Start Your Personal Budget
The first thing you can do is gather all of your bills and receipts, including credit card and cash receipts, for the past year and tally these up either on a piece of paper or a spreadsheet. Divide these into each month (as well as spending categories, if you are so inclined). This will give you an idea of how much you have spent in the past. Naturally you aren’t going to have receipts for all of your cash. So, in order to complete this exercise you will have to start tracking all of your expenses. For the next two months keep a small notebook with you in order to track everything. Write down all of your cash expenses, credit card usage, and every bill you pay. Here is an example:
Amount Method Item $4.87 cash coffee $30.00 cash gas $6.28 Visa lunch $14.95 MasterCard flowers
Do this for two months! This is important, because it will help you to better understand your spending habits and where your money is going.
Okay, I’ve Tracked My Expenses, Now What?
Once these are all tracked you can put them into a worksheet that categorizes each item. You can total everything you spend under each spending category. This will be what tells you where your money really is going. And why would you do that? Well, you might be surprised to discover a few things. Consider that when I did this I realised that I was spending over $75.00 per month on drinks alone – that’s not alcohol, it’s just the morning tea and such. And I was spending more than that on snacks (junk food). So that was over $150 per month on things that I didn’t really need. Once I cut those I not only saved a lot of money, but I also stopped gaining weight (a nice added bonus that I hadn’t anticipated or thought of). I still drink the tea, but I pack it in a thermos.
Now that you have it all in categories, you can total it all up and see how much spending you normally do each month. This tells you your overall expenses to live the lifestyle that you are used to.
Next you need to take your income into account. Include all sources and list each separately. Total these up. And how does this total compare to your total expenses? For most people they will find that they are either very close (sometimes the same), or the expenses will actually be higher than the income. Either way, this needs to change. If your income is a fair bit higher than your expenses, then congratulations! You’ve been doing well in that sense. But if it isn’t (like most people), then you need to start to manage a budget right away.
With your expenses at or exceeding your income, you will never be able to save for emergencies or retirement. Do you want to work all your life just making it by each month? Have a look at your expenses that you tracked. Find the easiest ones to cut the expenses in and start working at that. With diligence and good tracking, you will be able to save at least 10% of your income each month. Ideally you should be able to save 20% or more. If you can do that, then in four months you will have saved enough to survive for one month should you lose your income completely. Keep this up until you have at least three months, preferably six, of expenses saved. Then you can start investing for your future!