As a Financial Planner there is one thing I consider to be the most important starting point for anyone wishing to plan for their future. It sounds exciting, but I’m afraid it’s not. It’s actually pretty boring, and tedious; which is perhaps why so few people actually do it… budgeting.
Something most people would prefer they didn’t have to do, maybe because the results aren’t what we want them to be, or maybe because we think it will be too complicated, time consuming or just confusing. However in order to maximise your financial position it is essential.
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What is Budgeting?
Personal finances are ideally run like an efficient business; we need to know how much income and expenses are actually occurring in our lives. Budgeting is where you create a plan on how your money is spent. This allows you to determine in advance whether you will have enough money to do the things you need to do, and want to do. If the budget shows you don’t have enough money, then you must prioritize your spending. This is done by allocating your money on the things that are the most important. Budgeting will then allow us to identify which expenses, if any, can be cut back.
Why is Budgeting important?
The importance of budgeting cannot be overstated. It is a core part of financial planning. Some of the benefits are:
Having a predetermined spending plan for your money means that you are in control of your finances. There is also much less chance of you being financially stressed.
As budgeting requires you to create a spending plan for your money, it ensures that you will know whether you have enough money for the priorities in life. It is a great feeling to know that you have the money required to pay the important bills, and also to know how much you have available to spend on non-important ‘wants’.
Following a budget or spending plan will help you from allowing debt to get out of control. The banks want you to miss credit card repayments so they can charge you interest, so too with pay day lenders. Control your debt by controlling your budget. Having out of control debt is an awful feeling; avoid it.
Budgeting will create a safety cushion for when things go wrong. One component of budgeting is to create an emergency fund, and this emergency fund can be used when a car breaks-down or you need a new hot water system.
A budget informs you of your surplus funds every week or month. This means you can use this surplus productively rather than squander it. If you know you have an extra $300 every month, you can establish a savings plan for those funds. This is an important step towards true wealth and financial independence.
How to do a Budget?
A budget is your personal tool. It can be as simple or as complicated as you like. The most important thing is that you make a start.
You must first identify what timeframe to work on. Whether it is weekly, fortnightly or monthly, the end result should be the same – you just need to make sure its uniform.
Record your income
This should be the easy part of the process. Simply tally up all your income from work, government centrelink payments, investment income etc.
Calculate your expenses
This is a bit more time consuming due to the wide number of places our money seems to disappear to. Once you actually make a start though, it is not as hard as you first thought it would be.
The annual bills we get are fairly easy to do, we know when our car insurance comes in and approximately how much it will cost. Ditto for rates, rent, mortgage repayments, car loans etc.
For other essential purchases, by grouping your spending into categories the task of budgeting becomes easier. For instance, add up the supermarket receipts from each week or fortnight, and lump this total under groceries rather than breaking them down to actual grocery categories.
Discretionary spending, which covers entertainment, holidays, gifts etc take more time to work out. However it is very important to so as it is often the discretionary spending that offers the most room for savings. When you are able to identify that you spent $3,000 on gifts last year, or drank $4,000 of wine, you can make a deliberate effort to reduce it. The key point is not that you act on reducing anything, but that you identify the costs and are then in a position to decide whether you should continue with the discretionary spending or not.
Do you have a surplus?
Hopefully you do. And hopefully the above process of calculating expenses will have identified some wastage which can be cut. If so, you should look at allocating this surplus to:
1. Build up an emergency fund.
2. Reduce debt.
3. Commence an investment plan.
Free Budget Planner
Fortunately there are a great many free budget planning tools on the web. Cornish Wealth Management have created an excellent budget planner which is freely available for your use. You are able to download the excel spreadsheet onto your computer. It easily allows you to input costs, no matter which time frame they are incurred, and spread it across the timeframe you are working your budget to. It makes the budgeting process simpler because of the detailed list of suggested expenses.
If you happen to be on Centrelink benefits, then they offer a handy free service called ‘Centrepay‘ which helps with budgeting. You can use Centrepay to pay bills as regular deductions from your Centrelink payments.
To sum up, budgeting is a simple and effective way of managing your financial affairs. It is important to realise that making a budget does not mean that you are locking yourself into any limitations; rather it is simply allowing you to identify and monitor your expenditure.
Can’t be Bothered?
No worries; I get it. Not many people can. This is probably why most people live pay to pay.
I may have an acceptable alternative for you though. Use the free budget planner simply as an expense tracker. Don’t see it as anything other than keeping a record of where your money goes. This is just for you – there’s no judgement in how you spend your money and no attempt to try to get you to stop or cut back your spending. Simply an attempt to keep you informed on where your hard earned money goes. A mobile app is suitable for this too.