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Developing a budget

Budgets. A lot of us know we need them, but even the sight of the word is enough to freak some people right out. The truth of the matter is, there isn’t anything to be scared of. If you’ve downloaded our FREE Financial Guidance E-Course then you’ll be well on your way to managing the money you are earning.

pot_of_goldA budget is a plan, and a plan helps prepare you. Formulating a budget can be done simply by breaking down the necessary tasks, sitting and being honest with yourself, and walking yourself through a plan.

Feel empowered, knowing that you’re taking control of your financial future by developing a budget.

Step 1) Your financial goals

Chances are that a primary reason for creating a budget in the first place for most people is that they have a financial goal. Sit down and make a complete list of goals. Nothing is wrong here, they won’t all get accomplished instantly but you can accomplish them. Let’s start the list off by looking at some sample goals.

Sample goals

  • Be debt free
  • Moving out of home
  • Buy a car
  • Buy new supplies
  • Develop an emergency fund
  • Housing/down payments
  • Start a small business
  • Take a holiday
  • Take time off work

These goals are all equally valid and personal to their owners. The truth is that a lot of money waste that occurs happens because people don’t take the time to think about what they want and would like to save for, and they use the money on other things instead. Providing yourself with goals is going to help motivate you to stick to a budget once it’s set.

Get the family involved

If you have a partner, children, or other members of your immediate family – get them involved in this process! By taking time as a family to think about goals every one can get on board with, you increase the number of people committed to the budget, and also the number of people working towards these goals.

Saving is also an incredible gift to give a child, it’s a lifelong habit that can stay with them forever as they go into managing their own finances.

So get the family involved, from beginning to end. Have progress meetings, assess how you’re all doing, and track the spending. This sets up a loving environment of commitment, support, and mutual goal orientation that just might turn everyone’s dreams into a reality!

Step 2) Figuring out the expenses

Now that you know what you’re saving for, it’s time to figure out where you’re going to get the savings.

The key here is identifying how much money is coming in and how much is going out, and where the money that’s going out goes to. Start by figuring out your income, it should be easy enough to project. Once you have this information, you know exactly what you have to work with.

Now it’s time for the expenses. Be honest with yourself. Don’t just write down the essentials, write down the expenses you’re currently using on luxuries and impulse buying. It’s only by knowing what you’re spending on that you can control your spending.

Fixed expenses are unavoidable bills that you must pay monthly. The mortgage, loan repayments, Internet and phone are examples of fixed expenses.

You could choose to include your savings account in this list, this way you’ll see saving as a permanent occurrence.

Variable expenses include food, eating out and shopping for clothes etc. Don’t forget to include them too – every expense must be listed.

Step 3) Analyse your spending

It’s time to get realistic with yourself. Start keeping a financial journal, or using software to track your spending. It’s not always easy to remember to record that $2 latte, but it is critical to the success of your budget. You need to know exactly where your money is going to do a proper analysis of your spending.

Once it’s all there, sit down and look at it. Let it sink in. Figure out your spending patterns, both good and bad, and use that information to help set your budget up for success by being realistic – both about what needs to change and about what can’t. Ask yourself “where can I save some money?” remember you’re doing this to have a better and easier lifestyle in the future.

Step 4) Put the budget together

Alright, you have all the facts. How much is coming in, how much is going out, where it’s going, and what you want to do about it. This is where a lot of people stop, but they shouldn’t.

Understand that by taking control of your personal finances, you aren’t restricting yourself, you’re freeing yourself to actually start achieving the savings goals and dreams that you and your family hold. Budgeting doesn’t have to be a bad word at all.

Take some time and figure out what expenses can be reduced, how much is currently available to save, and what you can do to improve that last number.

How much should you be saving?

No one can answer this question for you. You know what your goals are, you know what your income is, and you need to determine a number that’s realistic but also somewhat comfortable. This is how you create a sustainable budget, by designing one that you can handle sticking to.

Don’t forget emergency savings

A lot of people put emergency savings out of their mind, especially in times of difficulty. This is a mistake. Emergencies happen, they happen often, and they’re always unexpected. If you don’t have money to fall back on during this time, you will only fall further into a bad financial situation – potentially putting yourself into crisis mode If you’re not careful.

You should aim to have saved enough to keep yourself running for at least 3 months. 3 months is enough time to get a new job, to recover from funeral expenses or a car accident, or to replace that dishwasher that just broke and still have plenty leftover. Don’t ignore your emergency savings, be prepared!

Step 5) Put the pedal to the metal – time to act!

You’ve identified goals, analysed expenses, set up a budget to work with both… all that’s left now is to follow the budget!

Keep in mind that you will need to track your spending and income continually as you follow the budget, to ensure you’re still properly accounting for all expenses and income and that you’re on track for managing your finances. Consider the following tips when tracking the progress of your budget:

  • Always record your pay amount and date
  • Pay expenses on time so you can accurately assess how much money that you have
  • If you find yourself coming up short, re-evaluate your accounting of the expenses and income, and look for ways to reduce expenses further.
  • Anything leftover can be saved!

What do I do if my income is not stable?

Not having a stable income is no reason not to have a budget. Keep track of your income as it comes in, and where it’s going, just like any one else would. This tracking will actually enable you to average out your unstable income, to make sure you’re still living financially realistically.

If you’re struggling with constantly spending your income as soon as it comes in, consider separating out your accounts into a holding account, and a spending account. Deposit all of your income into holding first, only paying yourself as you need to, to control your spending. This really slows down spending and is a great way to responsibly handle irregular pay checks.

Remember that there’s almost always a way to cut expenses if you need to, so don’t be afraid to take a hard look at yourself!

Step 6) Seasonal expenses

Christmas, birthdays, holidays. They’re all recurring expenses that most of us have, and that we know are coming. Work these expenses into your budget by creating a way to track them.
Begin by developing a binder, to keep track of the expenses. Then separate out a certain account for seasonal savings, and allocate some of the budget towards it. When you have a seasonal expense, spend out of that account and record it. This enables you to still be able to carefully track seasonal expenses, and keeps them factored into your budget. In fact, over the years you’ll only get better at budgeting for the seasons, knowing your average amounts that you need because of your careful management!

This kind of thinking is exactly the type of forward thinking that ensures that you’ve not only set up a budget, you’ve set up a sustainable financial future for yourself and your family. That’s a peace of mind that not a lot can provide, and you have earned it well by this point!

Step 7) Assess, reassess, and reassess

Life is always changing. Maybe you’ve changed jobs, maybe you got a raise, maybe you’re having a baby. All of these things call for the need to assess, reassess, and reassess your budget. Don’t be afraid of this, it’s normal.

The first stages of assessment will come early, when you first develop the budget. As you’re tailoring it to fit your actual expenses, you may find you did not allocate enough for your expenses, or that you overspent and need to go back to analysing spending. This is fine! By taking time to sit down and be honest with yourself, you’ll tweak that budget to perfection.

In the first year of your budget, you need to aim to have this sit down at least monthly. After the first year, if all is still going well, you can review it a little less frequently, but always have a firm grasp of what’s coming in and what’s going out – and where it’s going out. The longer you do this, the better you’ll get at it, so don’t get discouraged!

As you increase your income and savings, you may even find room to give yourself a bit of “blow money” that you can use on whatever you want. Enjoy these moments, and don’t be afraid to savour them. You’ve worked hard, you deserve a little splurge – every now and then.

A word on credit

Credit is a tool, a tool for affording things we cannot quite reach yet. But it should only be used extremely carefully. Keep the following tips in mind when interacting with credit to avoid the debt trap.

  • Always pay more than the minimum amount due on credit cards. This ensures you’re chipping away not just at interest, but also at the debt itself.
  • Keep reasonable credit card limits that allow you to pay them off within a year at most.
  • Only keep one to two credit cards, you shouldn’t need more and having more will only tempt you to spend more.
  • Pay your credit cards off. Every month. All of them. On time!