Managing Personal Budgets

If there is one thing that 2020 has taught me, it is something that I already knew but didn't always give it the due respect it deserves - How to budget effectively to enjoy the now whilst working on securing the future.

Budgeting can be a laborious task and one that, I will be the first to admit, is boring when you first get started. However, once the initial efforts have been invested, it is a piece of cake!

The Richest Man In Babylon

George S. Clason wrote one of the best books on wealth and personal finance and referred to 'The Seven Cures For A Lean Purse' - essentially, how to build wealth. One of the key take aways is that "a part of what you earn is yours to keep". In other words, save some of your earnings and ensure your bills aren't such that they eat into every penny/cent/pound/dollar that you have earned in that month.

In the book, Arkad (a poor scribe who eventually became the actual richest man in Babylon) goes on to teach others how to build wealth and "fatten thy purse" by way of outlining the Seven Cures:

1. Start By Fattening Thy Purse
2. Control Thy Expenditures
3. Make The Gold Multiply
4. Guard Thy Treasure From Loss
5. Make Of Thy Dwelling A Profitable Investment
6. Insure A Future Income
7. Increase Thy Ability To Earn

In this article I will address Cures 1 and 2 as these are the most difficult to implement and I feel that these are paramount in ensuring a robust, maintainable and achievable personal budget.

Fatten Thy Purse

In the first cure Arkad advises that "for every ten coins thou places within thy purse, take out for use but nine". Effectively advising what we all know today - save ten per cent of your monthly salary.

If you save one coin and spent the other nine each month, then by the end of the year you will have twelve coins saved whilst still being able to pay for your outgoings (and enjoy your life).

Control Thy Expenditures

"That what each of us calls our 'necessary expenses' will always grow to equal our incomes unless we protest to the contrary"

How many of us start to increase our spending as our earnings increase? I am certainly guilty of this. I am not saying there is anything wrong with it - in fact, it is natural that our standard of living increases as we benefit from greater income. However, where do we draw the line? This is where the real benefit lies - in controlling the outgoings.

Now for some this may be really difficult as mortgages, bills and other 'Liabilities' (refer to my previous article 'Wealth Creation: What They Don't Teach You At School') eat up nearly all of our monthly income. HOWEVER! If you take a good hard look at your monthly outgoings you may find that there are some items of expenditure that are discretionary that you have categorised as essential, and you would not miss it if it no longer existed.

Arkad mentions an interesting observation: "when I ceased to pay out more than 9/10ths of my earning, I managed to get along just as well. I was not shorter than before". Sound familiar? It does to me.

In Practise

As I have said above, I have always known how to budget and have loosely implemented it in my personal finances by setting aside 5-10% of my salary each month with the rest going to bills, needs and wants.

This year I have taken a close look at my expenses and have been brutal in cutting the 'wants' down to the absolute minimum. It has been easier to do as there have not been many opportunities to go out for meals, or head to the shops. This has resulted in me being able to increase the amount I can save/invest.

Have I missed meals out? I would be lying if I said no. However, I have managed just fine without. Have I missed the shopping spree? I cannot say that I have - the benefits of the extra funds available to save and invest in 'Assets' have far outweighed my 'quick-fix' short term wants.

So how did I do it? Below is a version of the approach I took:

1. List out every single expense I incurred each month. An easy way to do this is to download statements for each of the cards that you use. Excel is a great tool here (I am an Accountant after all!).
2. Next I put those expenses into buckets headed 'Need' and 'Want' - for example expenses relating to Mortgage, Food, Insurance would all be under the 'Need' header, and Travel, Eating Out (including takeaways), and designer clothes would land beneath the 'Want' heading. Be brutally honest here - the only person you will be cheating is yourself.
3. I then identified those expenses that I was incurring but did not benefit from. Luckily there was nothing here for me, but many people may for example have an expensive gym membership that they do not use, or other subscription services that are set up as an automatic payment (Direct Debit here in the UK). These should be reviewed and cancelled where possible, or reduced to the absolute minimum for the remainder of the contract if there are restrictions.
4. I then went back to my 'Need' column and systematically dissected each item to see if it was the best option in my current circumstances. Now, I appreciate that there are some items that cannot be changed easily (e.g. Mortgages), but if it cannot be changed now (e.g. due to being on a fixed rate mortgage for a set period of time) then I made a note of the date when I can make the change and have set a reminder in my diary for that date.

This exercise was painful to do but it was a one-off piece of work which is now maintained and takes approximately ten minutes per month to keep on top of.

When looking to buy things now I automatically ask myself a number of questions before I do so (Do I need it? Would I still buy it if it was full price? How much will I use it? What will I gain by buying it? How long will it make me happy? What else could I get for the price of this?). This isn't exhaustive but it gives a flavour of the 'due diligence' I undertake. Those questions aren't there to restrict my enjoyment - on the contrary! They are asked to ensure I get full enjoyment out of the purchase. Having my budget also helps when making those buying decisions.

Having a Save/Spend/Invest ratio will also help with this as long as you stick to it no matter the circumstances. For example for somebody earning ￡1,000/month they may decide on a 20/70/10 ratio to ensure that they have sufficient available to spend on their necessary (and some discretionary) expenses. This equates to ￡700 per month on expenses. If, once the 'Needs' are met, the individual has ￡150 left but has seen a 'Want' that costs ￡200 and so they look to their savings for the shortfall then this defeats the purpose.

The disciplined amongst us would wait until next month, where they should have another ￡150 of which they can take ￡50. Or alternatively, the month of waiting may have removed the desire for said item altogether!

Discipline is key.

Closing Comments

Budgeting is an art - but it is one of the easy ones to master if you have the discipline and are honest in your approach.

If done correctly and used in conjunction with effective investing (i.e. purchasing Assets instead of Liabilities), with the benefits of compounding, it can become an extremely powerful tool for creating wealth.

I will leave you with the words of Arkad - The Richest Man in Babylon:

"Budget thy expenses that thou mayest have coins to pay for the necessities, to pay for thy enjoyments and to gratify thy worthwhile desires without spending more than nine-tenths of thy earnings"

Note: I am not a financial adviser. This article is a portrayal of my experience in budgeting and use of knowledge gained from reading relevant texts, and should in no way be used as financial advice. Before making any financial decisions it is good practice to speak to a qualified financial adviser who will provide guidance based on your individual circumstances.