Hi There, it’s me Journey-Man again and I’m working on my budget!
This time around I am talking through some of the basics of budgeting. Believe me, I know that you are not terribly interested and would rather eat sand than think about budgeting. But, I would like to encourage you to stick around because (and this is the most important part of this article), if you don’t have a budget, you have a problem.
Actually (and you’ll know your personal situation) I would suggest that if you have no money, if you have debt problems, if you haven’t saved enough, if you are worried about retirement – you’ve probably never taken the time to set-up, use or implement a budget.
I’ll say it again – this could be the breakthrough you have been searching for. A budget is like a not-so-secret key (we all know we need it) that we are not quite sure how to use. But that key unlocks the future of your money. That key unlocks the real reason for the money-problems and that key, that simple, boring and seemingly unattainable key, is a budget.
Don’t stop reading now!
What is this BUDGET you speak of?
A personal budget is the simplest thing in financial terms. It is an estimate of what you earn and what you spend (your income and expenditure) for a period. A monthly budget would be that estimation for a month. An annual budget? You guessed it, the same estimation for twelve months!
It really is that simple. It is also right there that we can see (very clearly) why we make some of our biggest financial mistakes. Here is a valuable secret – when you spend too much, when you take on debt that you can’t afford, it’s generally, directly linked to your inability to estimate what you earn and what you can spend. Actually, we also conveniently trick ourselves into not thinking about these things (what we earn and what we can spend) when we are looking to buy something we can’t afford.
Why don’t you have a BUDGET?
There are probably many reasons you don’t have a budget, for me, part of the Journey has been to come to terms with many of the following common reasons (tick off the ones that apply to you): –
- I didn’t realise it’s important
- I didn’t think that I needed one
- I didn’t know how to put one together
- I have a steady income, so I didn’t need one
- I didn’t want to deprive myself of things
- I don’t need anything big or expensive so I didn’t need to budget and save
- I didn’t have any substantial (real/bad) debt
- I didn’t have the discipline
- I always believed that I would earn more money
If you don’t have a budget I would assume that you ticked off at least five of those reasons.
They really are common. You really aren’t unique (sorry to tell you this but there are millions of people in our Country in the same boat as you) and they really seem quite reasonable. That’s part of the problem. They seem quite reasonable. We can convince ourselves on any given day that we will find a way out without planning a way out. How’s that working for you? It really hasn’t worked that well for me.
I am hoping that, like me, you are getting tired of the voice in your head (you know that nagging Nike advert – just do it, just do it, just do it!) and you are going to realise that you need a budget.
Right, how do you build a personal budget?
As with any type of building, baking or creating, you need to gather ingredients or supplies. You need a recipe, you need measurements. You need equipment. Luckily, when it comes to doing your personal budget, everything is pretty easy to find. You just need to spend some time getting everything you need.
#1 What do you have?
If you have any accounts, whether savings accounts, cheque accounts or investment accounts you need to know how much is in each and what the interest rate is for each. This information will be important for working out what you are worth. If the answers are all zero, please don’t give up, that is just a fact that you will deal with. This is an important step, regardless of how much you actually have. The reality is that most people reading this will laugh (investment accounts!) and give up. Don’t give up. Soldier on
#2 How much do you earn?
This may seem easy but not all of us earn a regular monthly, after-tax income. You need to know exactly what your income is or, you need to estimate (as accurately as possible) to ensure that you have a reasonably accurate estimation. If you earn an irregular income you can consider using an average or using a low estimate (this means you will have a conservative earnings estimate). Still all pretty easy. Let’s keep going.
#3 What do you spend your money on?
This is probably the toughest one because we don’t always want to admit what we spend our money on or, we don’t actually know. You need to know what your debts are, you need to know who you are paying, you need to know what the interest rates are.
At this point you may need to take some time to ensure that you have all of the spending information you need. You need your bank account statements so that you can work out exactly what your monthly expense are (the debit orders and deductions coming off each month).
You may need to track your expenses for a month (or two) to get a handle on what you spend your money on. This has been a valuable exercise for me, Journey-Man, because it has highlighted the ease with which I waste my hard-earned money (taking a reality check is very important).
For your debts you need to know what you still owe and what the minimum repayment amount is. You need to do this for all of your debt repayments including your home-loan (mortgage), car-loans, credit card debts and any other debt repayment that you have.
You need to know what the monthly recurring expenses are. You can do this by collecting all of the bills and statements you receive (these days most of them are probably in your e-mail inbox). Including things like utility bills, pay-tv accounts, retail accounts and other monthly recurring expenses.
#4 Categorise your spending
It is very helpful to categorise your spending. You can be as simple or as complicated as suits you. It is important though (and very helpful) to categorise your expenses.
Before you proceed…
The next step will be to record the information we have gathered. Before you get there make sure that you have EVERYTHING you need. Don’t start fiddling with Apps and Spreadsheets if you haven’t gathered all the information you need. You will be amazed at how much time you can spend fiddling, the point here is to get complete, accurate and relevant data so that we can use whatever tool we choose as effectively as possible.
#5 Record it!
There are so many ways to record the information you have gathered. It is not important how you record your information. You can choose an old-fashioned note-book, pen and calculator or you can choose a spreadsheet, or you can download an application. There are so many options.
If you use Microsoft Excel, you can use the budget templates that come pre-packaged with the application or you can use applications like YNAB (You need a budget) for example.
There are many options available. The point though, is that you need to get your income and expenditure estimated and recorded. It is as simple as that.
#6 What is the result?
If you have entered your income and expenditure accurately, you are going to get to a result. The result will be one of two things – positive or negative. If you are spending (or need to spend) more than you are earning then the result will be negative. You don’t have to be negative, you just have to start being honest about your spending. If the result is negative you need to start planning to reduce the debts (we will get there).
If the result is positive it means you are earning more than you spend. This is good news and will allow you to start thinking about real savings and investments.
Right, what’s next?
Knowing where things stand is very important. Don’t worry too much if your budget doesn’t ‘balance’ – if you are spending more than you earn you will need to do something (we will be dealing with some actions as we go). If you have extra cash available (your budget is positive) then it’s time to start moving ahead rapidly. It’s time to start looking at the best ways to save and invest. We will deal with that too, as we go.
For now, make sure that you have a budget. Make sure that you have completed all of these six steps properly (in detail) so that you have uncovered any and all skeletons in that financial closet of yours.
In the next articles on our journey we will deal with the positives and the negatives, please keep following Journey-Man!
We also have some great articles on WellSpent dealing with budgeting:-
You can also head over to one of our favorite blogs, Take Charge of Your Money for some great budgeting tips, ideas and articles.
Until next time, this is Journey-Man,
Working hard, walking hard and taking drastic action. Not just for myself, but for my kids and the next generation of Journey-Men and Journey-Women.
Please remember that I am not providing any financial advice here. If you are unsure of the best way to attack your bad-debt you should consider talking to a Financial Service Provider.