Budgeting

Budgeting. It is absolutely essential for anyone wanting to take control of their finances, and to stretch out their income, to create and maintain an effective budget.

Budgeting not only helps you to identify exactly how much money you have, need, and are likely to spend, but it also offers valuable insights into where exactly your money goes, and helps you to identify areas where savings can be made.

The key to successful budgeting is in the detail of the budget itself. The more detailed you are about your income and expenditure, the easier it is to make adjustments to your spending where necessary. Having said that though, a budget needn’t be that complicated to prepare and you can start off slowly and build your budget up over time.

As your budget plan becomes more detailed, you can start to spot trends in your spending habits, identify areas where you can cut back and pay off any debt, and you can start to plan for investing or saving for the future.

The basics of a budget

The first, and best, thing you should do when setting out your budget is to give it a heading. And not just any heading like ‘Budget’, or ‘My Budget’, but a heading that spells out your financial motivation. For example, ‘Budget to Purchase Our New Home by Summer’. Doing this means that each time you look at your budget (and it should be quite often), you’ll see the reason why you’re doing all this hard work, and hopefully gain a small measure of motivation from it.

Next, make a list of all your income (after tax). You can do this by weekly income, monthly income or even yearly income depending on what suits you best. Generally speaking, it’s easiest to work on a monthly basis as this is generally the payment cycle for many people with salaries, and for many of the bills that you’re likely to have. Keep all of your income in one column, and list all of your expenses such as rent, food, petrol etc, in the other column. Don’t worry at this stage if you can’t think of all your expenses, just make sure to list all of the major ones.

Once you’ve listed all your income and expenses, you can add up the totals and subtract your expenses from your income. Hopefully at this point you have more income than expenses, and the figure that is left over is a rough guide to how much disposable income you have left over each month. If, after just making up a simple budget, your expenses outstrip your income and you have no disposable income, then you seriously need to evaluate your expenses and cut back where possible.

While this general overview of your expenses might seem a little simplistic to be of any use financially, the sad truth is that many people who experience financial difficulty make their situation worse by refusing to acknowledge their predicament in the first place. By putting your income and expenses down on paper in this fashion, albeit somewhat simplified, you are forced to look at the reality of your finances and can see at a glance the situation as it really is.