Everyone needs a budget
The word ‘budget’ can strike fear into the heart of anyone who enjoys indulging in the finer things in life, although it needn’t.
One of the most basic pieces of financial advice that everyone can heed is to create and follow a budget. Budgeting is an essential tool in planning for the present and future. And ensuring that you don’t spend more than you earn – one of the most basic tenets of building wealth.
Although budgeting is one of the simplest ways in which to improve your financial position, a 2019 poll by Debt.com indicated that only 67% of American adults have one in place. More alarming than this was the fact that just 25% of those surveyed believed that “everyone should have a budget”. No mention was made of how many respondents manage to stick to their monthly financial plans.
While there are those who don’t need a budget – usually individuals who are extremely frugal, don’t have any debt or have avoided lifestyle creep – the overwhelming majority of the population needs some kind of framework to keep track of their spending.
How to make a budget work for you
In its most basic form, a budget is a strategy for allocating your income. It can be drawn up on a weekly, monthly or annual basis, and can be meticulously detailed or beautifully brief. The format is not what’s important here; rather, it’s how you use it that matters.
Many of us hold the view that a budget is a limiting device that deprives the user of any enjoyment or reward. This mindset often prevents us from setting up a budget, for fear that we might ‘miss out’. But by approaching your budget as a tool for enabling greater long-term success, the idea of mapping out your finances becomes far less restrictive.
Let’s say that you have a medium- to long-term goal that requires you saving a relatively large sum of money. This could be going on an overseas holiday, putting down a deposit on a house, increasing your retirement savings or paying off your credit card. By setting a date by which you would like to achieve this goal and putting aside money each month, the objective is easily achievable.
However, even with the most well-defined goal, it can be easy to fall into the trap of wasting money on unnecessary items. This is because humans are notoriously bad at depriving ourselves of immediate rewards – even when there’s a defined future benefit.
Having a budget can help in two ways in this scenario. First, setting out your life and financial goals and aligning these will help you to alter your behaviours, which can prevent unnecessary expenditure. Second, tracking how much you’ve saved or how much debt you’ve paid off can be extremely motivating and will likely encourage you to continue.
Another strategy that can change your attitude towards budgeting is personalisation. Prioritising and providing for items that you value can give you a greater sense of financial freedom. Perhaps you enjoy eating out. Making provision for this in your budget will enable you to enjoy a dinner out without guilt and help you to avoid the despondency that comes after failing to stick to a strict plan.
How to set up a budget
While there are various approaches to setting up a personal budget, it’s essential that you know what your monthly income is and have an idea of your expenses. It’s usually best to take a look at a few months’ bank statements to do this. Once you’ve identified your income and expenditure, you can follow three basic steps to set up your budget:
- Write out your total income for the month
- Set down your fixed expenses, e.g. rent, car repayments and insurance
- Write down your variable expenses like food, water and entertainment
- Subtract your expenses from your income
If your answer from step four is zero or a positive number and you’ve already made provision for saving or paying off any debt you might have, this is your budget. If the answer is a negative number or zero and you haven’t saved anything, you can revisit some of the variable expenses you wrote down and see which can be reduced or eliminated.
The final step is tracking your spending throughout the month. This is the most challenging stage, as it requires regular attention. But once you’re monitoring your spending, it becomes easier to change your habits and set new financial goals.
