Managing Your Money: You need a Budget
An Acceler8now.com Investing Education Resource August, 2007
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Are you ready to get your finances in shape? Do you want to get in firm control of your financial situation, instead of leaving things to chance and drifting? Then you must begin to apply the tools that will help you get a grip on your finances. Budgeting is one of such tools. Budgeting is actually a familiar word, as you often hear people speak of budgeting for one item or the other. Not all of such people however understand the concept in a precise sense. Budgeting can get technical, like when professional accountants are working on one, but nobody expects you to become an accountant, just to enjoy the benefit of personal budgeting. So, are looking at simple personal budgeting that can help you plan and control your spending, track your progress and identify areas of difficulty which you need to beat into shape.
What You Spend On
Before you can knock out a personal budget, you will need to identify what you spend money on. The serious business of expenditure planning, which you are getting into, does not admit of your continuing to recycle your current spending pattern, unless it's perfectly okay for your financial needs.
Whatever the case, you need to track your current spending, as a starting point. Two factors are important there: what expenditure categories you spend on and the average monthly level for each. If you don't presently keep any record of your spending, that may be your best starting point: spend the next few months recording your spending, classified into various expenditure categories. That way, you can determine what you spend on and the average monthly outlay.
Where You Money Comes From
Your budget will need to work with your income details too - sources and levels of
income available to you. This, for most people, won't prove too difficult as income sources are neither too many nor obscure.
The Budget Objective
Your budget is not intended as just a classification of your income sources and expenditure heads. It is a planning tool, a personal finance management instrument. Your intent has to be clear to you.
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Ideally, you want to identify and curb waste.
- You want to shift spending as much as possible to priority needs.
- You want to stretch your income to clear any interest-bearing debts you owe, especially those at commercial rates.
- You should want to excise a sizeable sum to set aside as saving for investment.
- You want to provide something for known future commitments that are not due but cannot be met out of the income of the period when they are expected to occur.
- You want some provision against the unknown; contingencies of life that cannot be ruled out.
- You want to tinker with income, where possible, to see what new streams or increases you can engineer.
The objectives you define for yourself will, understandably, colour the shape of the budget you prepare. Your budget in this case is taken to be for a monthly rolling timeframe, though nothing stops you from doing a budget for one year, for instance.
Putting Your Budget Together
With the necessary preparation done, your next step is to work out your budget. The following steps are recommended:
- First, tabulate your income streams, knowing that only the net figures are useful here. You gross pay, for instance, is not fully available to you since tax and other statutory deductions will be netted off. The total income gives the monthly sum that is available for spending and any other purpose. Are there areas of improvement you can achieve? Don't make your budget a purely expenditure cutting process - consider working up your earnings in areas that are feasible.
- Tabulate your current expenditure heads, properly classified. I recommend you create two figure columns to go with the list. Enter, in the first column, your current spending on each item.
- Evaluate the current spending figure your have for each item, taking into account what it grosses to in one year, and decide what you realistically think you will like to have that figure at. Endeavour to slice off whatever you can, provided you remain realistic, knowing that the true test of success is in operating within the budget.
- Never forget to include lines for provisions you want to make against special non-recurrent items that will occur at future dates which you need to begin to set money aside for.
- Of course, the king of all provisions - the payment to yourself, that portion that will be put to work to earn more money for you, possibly restoring what goes into those expenditure categories.
- You can't leave out contingencies, because they are a part of life. Make a reasonable provision. Since it's not an expenditure head, its no basis to increase any particular expenditure and will be creamed off to saving if unutilized.
- Did it balance? This is where you sum up the figures you have on the expenditure side, including the planned saving and provisions, to compare with the total income figure. If the projected outflow exceeds the inflow, you need to revisit the figures and begin to work them down, beginning from items of lower priority. This has to continue until your figures match up. If, on the other hand, its the income that exceeds expenditure, consider increasing your saving first. Otherwise you may allow more room for certain important spending heads where you possibly can justify more spending.
- You can then dispense with the column for past spending which merely provided a guide as to current levels of expenditure.
- In the end, your budget ought to achieve the goals you set out, including achieving a balance, since you certainly don't want to operate a deficit, financed by borrowing.
 So what will your budget look like? Income sources and expenditure categories will vary between individuals, so your budget is personal to you, reflecting your own priorities and what you want to spend on. We have, however, provided a specimen structure to show what your budget might look like. Go here to see it.
Budget Implementation
Having set up your budget, the next challenge is to implement it faithfully. You didn't take all the trouble for nothing, so it is expected that you will strive to operate within your budget. Monitoring your budget requires tracking your spending (again!) since you need to know if and when you are overshooting. A simple statement of variance analysis will help you see how you have performed. That statement simply compares the actual figures of income and expenditure with the budget figures you have set. Where any significant differences have occurred, you will need to evaluate the reasons as a basis for improving your budgeting or the expenditure control process. Get this working for a while and it all becomes a habit, an eye-opening process and an important way to instill disciple in the management of your finances.
Copyright © 2007. Acceler8now.com. All rights reserved.
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