A sign in a dentist’s office gives sound advice. “You need only brush the teeth you want to keep.” And when it comes to money it might be true to say “You need only plan for the money that you want to keep!”
Budgeting, or planning your income and expenditure, is likely to increase the amount you have for the “finer things in life.” All too often your savings are used to cover unforeseen expenses and unusual costs and only occasionally, to spoil yourself or your loved ones. It is suggested that these “unforeseen” expenses always occur and whilst they vary in amount or urgency it’s fair to say that when you start planning your income and expenditure you should always make allowance for the unforeseen expenses, a “contingency amount” as it were.
Some folk are naturally frugal and so saving money is par for the course. But if we’re honest, most of us tend to “spend what we get” and in today’s economy often what is spent is all necessary or at least seems so. So if the norm is for you to run out of money in the third week of the month and have to resort to “bread and water only,” well then, what is the point of a budget? For years there has been the often repeated wisdom that what you measure can improve by at least 15%; this is certainly true for businesses and it is suggested that it is probably true of all human activity.
Okay, so there are solid reasons to budget or plan your income and expenditure. What next?
Often one of the best indicators of the future is the past so the first step is to try and understand what happened over the last few months. The more history you have is likely to give you better insight, particularly of the unexpected or unforeseen amounts that tend to crop up. If you pay most of your accounts via a credit card, stop orders and occasionally cheques then getting an understanding of the history is simply a question of looking through the statements and making a summary. However if the bulk of your payments are in cash then you will need to try and relate the “bulk amounts” you withdrew with what you commonly know you spend; in this case you will probably end up with some unexplained “holes” in your understanding of where the money went. So if you spend a lot of cash you probably need to keep some memo for yourself as to what the cash is spent on. You might even find a smart phone app to help you. As you review what you have spent you will no doubt find yourself thinking, Why did I buy that? Why did I go there? So already the effort of preparing a plan is paying off.
Next? Well, the actual budget process is quite simple in principle. Map out what you are likely to receive each month after the deductions and list what you anticipate your trend of expenditure is going to be. Remember to put in an expenditure item called “unforeseen” which is more than likely going to be a specific amount that you set as a monthly allowance. The objective is to determine what amount you have left over after you have provided for all the expenses that you have no choice but to spend. This should include the amount for “unforeseen.” If there is an amount left over (i.e. income less “no choice” expenses and the allowance for “unforeseen”), this amount is often viewed as what you have for “discretionary” expenditure. It is called discretionary in that you have the choice as to what to do with it.
It is suggested that at this point you should then set an amount for saving so that the amount you consider to be available for non-essentials is determined after you have planned for your future.
The challenge is that most of us are under the impression that we don’t have disposable income let alone money to save. The reality is that if one believes that then that will be the reality and financial struggle is the likely future. It is said only a fool expects different results if they continue to do the same thing. So if, once you have done your analysis in preparation for your budget, you find that there is no balance left over, simply go back and re-assess what you deem as “non-discretionary” or “essential” and either reduce it somehow by a change in behaviour or “go without something” so that there is something left over each month for “future unforeseen expenses” and something for savings.
One can talk about savings goals, what to do with savings, what to invest in or even planning for retirement but all of these depend on having a surplus over a period of time and for many that requires a monthly, even daily, discipline of spending what needs to be spent and no more. But as the old adage goes, practice makes perfect, so start today and make every penny count. Your future will be all the brighter for it.
Date Published: 26 January 2017