How To Budget – A Guide To Budgeting

 Found this article that I thought you would find interesting and useful…Enjoy!

 

Budgeting is like your responsible friend at a party. You know the one; you see them every Saturday night. They’re a bit sleepy by the time it comes to the party, probably because they were up early that morning for a jog.

They’re content to drive there, and stick to a beer or two. Probably they’ll also do a bit of a surreptitious clean before they head home. They are never the person that wild stories get told about, but at the end of the day, they are always the person who gets you home safe. They remember your birthday, they help with the washing up after dinner. They might not be flashy, but they are one of the major reasons the world continues to spin in it’s relatively peaceful manner.

The same can be said of budgeting. It’s not sexy, but the results are. It’s not really enjoyable (unless you like counting pennies) but the freedom that comes from budgeting certainly is. Living within your budget is the key to keeping your world spinning in a relatively peaceful manner.

Here is the Savings Guide A-Z of budgeting and how to budget.

The benefits of budgeting

Budgeting brings with it a number of benefits. Here are the top reasons to create a budget and how you will feel as a result.

You will lower your stress: Perhaps nothing in life is stress free, but I can guarantee the fastest way to feel more at peace with your finances is not to get the all-important raise, but to sit down and work out a budget.

You will gain control (again): Related to the above, helplessness is one of the more debilitating feelings around there. Regardless of how bad it might be, once you have a budget, you’ll be able to gain control of your finances and, by extension, your life.

You will get more space around you: A budget- and the results of a budget- allow you the space to take opportunities that come your way, and to respond easily to issues that crop up.

You will gain a sense of security: With space comes security. You can rest easy in the knowledge that you have the ability to deal with emergencies, without having to undermine your financial security.

Goal: And, most importantly of all, budgeting allows you to achieve your financial, and lifestyle, goals. In a manner that is sustainable and financially prudent.

The importance of budgeting

The Micawber Principle: The Micawber Principle, as sound a financial dictum as ever was spoke, was hidden in the midst of Charles Dickens’ masterpiece David Copperfield. Translated into daily parlance, Micawber suggests that, “Income twenty dollars. Expenditure nineteen dollars and fifty cents. Result? Happiness. Income, twenty dollars. Expenditure, twenty dollars and fifty cents. Result? Ruin”.

It might be fictional, but nothing could be more accurate. Living below our income is essential in our financial well-being, and a budget is the way to achieve it.

Savings: With that space in our budgets, we’re able to set aside savings. We might have a thousand different goals (see below) but a steady, and ongoing savings schedule allows us to achieve it.

Grow your money: A budget not only allows to improve your financial set-up by reducing what you spend, it also allows you to invest the money you save and grow it. I believe that’s what might be referred to as a win-win.

How to create a budget

To make a budget, you must consider the following:

Income

Decide whether your budget is going to be weekly, fortnightly. I would usually choose whichever budget aligns with the regularity of when you get paid. Once you’ve decided, write down all the income you receive in that month.

Expenses

Write down everything you spend in a week. Chances are you won;t get it right on the first stab, as we spend unconsciously.

Here are some ways to track what you’re spending for your budget:

• Keep a spending diary.
• Keep all your receipts, and tally them at the end of the week.
• Go through your daily bank account, to check for debits from your account (insurance, membership fees et) that you might not even have be aware of.
• Use a tracking app, such as Expense Manager or Expenditure.

Are you in the red? Or in the black?

Tally up your figures, and you’ll have an initial idea of whether you are running your finances in the red or the black. If you’re in the black, fantastic! You now can just add some extra space in your finances. If you’re in the red, a budget will help you to get back on track. Why not colour code using red and black to help you?

Analyse where your money is going & where your budget is leaking

Where is the money heading? What area of your life is draining your finances the most? Chances are, if your budgets look anything like mine, entertainment costs are always shocking. The amount I spend unconsciously on food, shows and late night tipples are, without a doubt, the major unnecessary drain on my income.

What are your essential costs, and how much do you have left over once they’re paid for?

Trim the fat from your budget

Now look for where you can cut back. Discretionary spending is a major source of savings in a budget.

Aim to reduce your spending, not cut it out entirely. Great budgets are consistently refined and improved, so start relatively gently. How much do you need to save to get into within your income? Where can that come from easily, and sustainably?

Consider these points:

1. Housing costs should only comprise 30% or less of your net income. If it’s costing more than that, perhaps it’s time to make some big decisions about where or how you live.
2. The average Australian household spends the same amount on alcohol as they do in utilities per week. If that’s the case, there is a major saving opportunity there.
3. We should always consider what we have (in the pantry, in the house to sell) when writing out budgets.
4. We should aim to declutter our life to add extra money to our budget. Sell the stuff you don’t need people!

Draft budget

You now have a draft budget. I would call it a draft, as it is a work in progress, one that needs continual revision and maintenance. You should have allocated a general sum to each section of your life, including a sustainable and sensible amount you will be saving per week.

Tips to help you succeed with your budget

For the best results when budgeting, you should consider these three core principles:

• Automate your money. As soon as your pay comes in, automatically move your money into the sections you have decreed for your budget. This means money gets automatically deposited for rent, debt repayments, savings etc. We can be our own worst enemy, so take yourself out of the equation.
• Discretionary cash. For your entertainment budget throughout the week, I like to have it in cash. The reason? Because once it’s gone, I know I’ll just have to stay in and watch TV until next week.
• Keep it simple. It’s essential to not start out too strictly with a budget, it’s often where people fall down (more on this below). Remember, you can always save any money that’s left over and you can always change the amount you’re budgeting throughout the week.

Maintaining your budget

Once you have a budget, you will find yourself needing to occasionally maintain it and update it as you go.

Track your budget progress

The absolute best way of maintaining enthusiasm and drive is to watch how your finances have improved. Look at your dwindling debt, or increasing emergency fund. You’ll feel empowered and capable of continuing all the good work.

Use a budget program

Apps such as iReconcile or Moneybook can be a great way to easily manage you budget if you’re technically minded. Alternatively there is the Savings Guide made budget planner for purchase here.

Constantly revise your budget

I can’t stress this enough. Budgets are ongoing processes- sometimes they’re too harsh, sometimes they’re too soft. Could you save more? Are you living at an absolute pinch, and eating only two minute noodles? Extremes are never good, and great personal finance is about sustainable saving.

Keep your budget goal orientated

It’s easy to lose motivation, and everybody does. The key is to continue to look at your goals, adapt your goals and celebrate how much closer you are to achieving them.

Fixing your budget

Got a problem with your budget? Here are some solutions to common budgeting woes.

Losing motivation: Your budget fit isn’t right. Either your budget is too tight, and you’re unhappy or it’s too loose and you’re not seeing the changes you need. Use some trial and error to work out what fit works for you. You can change your budget figures from week to week, until you get it right. The important thing is it’s both comfortable and effective.

Broke the budget: It happens to everyone. Don’t give up on the whole thing because of one bad week. It’s a slip up, not game over, so just move on.

Forgotten expenses: A major expense can easily be forgotten, and can easily undermine a lot of hard work when it it is. Don’t panic, this is why we budget, to ensure that unexpected expense is covered. Note the expense in your revised budget, and you can be sure you won’t have to worry about it again.

You get a pay raise: Add it into your budget, but aim to invest the raise in your savings or debt repayment. You’ll be amazed at how quickly your finances improve, and how budgets can enable you to live within your means,

Your budgeting goals

Live within your income

Living within your income, as detailed above, is the essential step to freedom. Financially, and otherwise, maintaining a bit of space between expenditure and income (to a large extent, regardless of what that income might be) is possibly the most important step you can take to improve your finances.

Create an emergency fund or cash stash

Without an emergency fund, all budgets and savings can be shot to hell pretty quickly. The danger with a strict savings schedule is that we can put too much money away, and out of reach, only to need it when the car radiator croaks it. Most personal finance writers will suggest that an emergency fund is your first port-of-call for savings. This can protect you from debt, investment loss or short-term options that are detrimental to your finances in the long run.

For those not wanting to make an emergency fund, why not consider saving cash to help you build a ‘cash stash’ – it’s better to have a few dollars than nothing at all.

Pay off debt

Personal finance writers are divided between whether you should bolster your savings or pay off your debt first. Once you have an emergency fund, the way you organise your budget is up to you. I personally would always try and knock debt out pretty quickly, not solely for the interest drain, but for the drain on your mental wellbeing. Savings Guide has written several articles on the best methods to pay off your debt.

Set up a regular savings plan

You want to be saving 5-10% of your income, I would suggest that is on top of your retirement savings. You might have short-term savings goals, but I would always direct some of the savings towards long-term, rainy-day savings plans as well. It’s a delicate balance, between saving for a variety of goals or spreading yourself too thin, but this is where a revisable budget is perfect.

Improve your investments to make more money

Once you’ve achieved all these goals, a budget will help you to increase and maintain your investment strategy and grow your wealth.

Start a ‘zero dollar budget’

A zero dollar budget basically refers to the concept of ‘spending’ every single dollar you earn in your budget spreadsheet or paper spreadsheet, BEFORE the month begins. This means that every dollar in your earnings is accounted for on or before pay day.

The idea is that you will assign every dollar you have to each of your expenses, even a savings account should be seen as an expense. If you reach your limit for your category, like I did with my ‘transport’ costs this month – simply stop spending in that category and find a way to reduce the costs.

You may wonder how I can reduce the costs of transport – though really it was simple, I caught the train and will continue to catch the train until the end of February.

If the zero dollar budget is going to work well for you, you MUST organize time in your monthly activities to sit down and figure out the following months expenses. This can be done by making it a fun task, organize the husband/wife/kids or whoever and sit down for 45 minutes on a Sunday morning.

Quick zero dollar budgeting tips:

• Always include your savings accounts in your zero dollar budget
• Always pay yourself at the very start of the month.
• Seperate your savings from your everyday account – this will reduce spending
• If you earn extra money in the month, ensure you account for it in your budget
• Consider having an account or fund that is for fun things and spare of the moment activities. Don’t lose your fun in life simply for a few dollars!

Budgeting gives you a sense of freedom

I used to think budgeting would mean every aspect of my life was planned out. Now I realise, instead, it allows me to do whatever I want to do.

Freedom from stress and certainly freedom from debt allows us to make sensible, sustainable financial decisions and achieve the goals that really matter.

The best part of it is that budgets are not an item, but a process. We have the freedom to change them, adapt them, work on them and use them until they are an essential tool of our financial freedom.

 

 

Source Link: https://www.savingsguide.com.au/how-to-budget/

If you need anything further, please don’t hesitate to call me at (0400) 032-110.

Cheers,

Bill