I know, who wants to think about the nitty gritty aspects of managing your money? No one, unless its because you’ve won this weeks lotto and you need to decide which country to buy your holiday house in, and which charities will also benefit.
Unless you are that lucky winner you’ll need to at least read the rest of this post. Budgeting might seem like a long and boring task, but it is vital for ensuring you stay out of debt. Living within your means is very important for reaching your long term financial goals.
It can be tricky to make sure you aren’t spending more then your income when credit cards and loans are so easily accessed. The buy now, pay later system helps aid the need we feel for instant gratification, but how is it leaving your personal financial situation?
Its for these reasons everyone needs a budget. You need to know where your money is going so that you know where you can spend less, or save money.
Below are a few guidelines for helping you to manage your money and getting started on budgeting.
Where do I start when creating a budget?
The first thing you need to know is your total income and expenses, also known as cash flow. Once you know these 2 key factors the rest is simple.
Step 1 – calculate your monthly net income.
I have chosen per month because its a clearer way to look at the year overall, and because most bills are due monthly. If you work casual hours, or are self employed you can calculate your income by dividing last years annual income by 12.
Step 2 – add up all your fixed expenses.
These are all of the regular bills and payments that need to be paid. They can include things like: rent, home loan, student loan, utilities, car payments, etc.
Step 3 – calculate how much you need to save every month towards your financial goals.
The easiest way to make sure you save your savings is to think of them as an expense. It becomes much easier to not spend when you consider it a bill. These kind of expenses can be anything from reducing your debt, saving for a house deposit, to saving for a holiday.
Step 4 – Calculate your variable expenses.
These are the kind of expenses that you can cut back on or choose cheaper alternatives if needed, like food, petrol, eating out, entertainment, gifts, clothes, etc.
Step 5 – consider fun expenses.
These are non essentials, but they are the things most likely to blow your budget when you head out to the shops. You need to plan for splurge spending or you will definitely blow the budget and its usually your savings that suffer.
This category can include things like designer clothes, a new computer, a long weekend at the beach etc.
Step 6 – Deduct all of your expenses from your net income.
Once you have all of your figures broken down into monthly sections you can clearly see where your money is going, and where you can make some changes. There are 3 possible outcomes for this final calculation; break even (this is the ideal outcome seeing that you have listed exactly where you want all of your money to go), extra cash (meaning you have money left over after having listed everything), or finally, you’re in the red (this means you are living outside your income and possibly accumulating a lot of debt).
Whatever your outcome you now have a better idea of where your money is going and what you can do about it. Don’t forget you don’t necessarily need to make more money if you find yourself outside of your income, you may just need to live a little more frugally.
Coming soon a post on how you can ensure you keep each of your expenses within your budgeted figures!
Please note that the opinions and information provided in this post are for general information only and are not intended to provide specific advice or recommendations for any individual. For a better understanding of your personal situation I recommend seeing a certified financial planner.