Budgeting

Budgeting is deciding what you want to do with your money. By checking and comparing what you earn, with what you spend, you are putting yourself in control of your finances. Budgeting will also help you decide what to do with any money you may have left over that’s surplus to your immediate needs – save it for a rainy day or invest it for the long term in a pension for example? Budgeting requires you to be realistic and as accurate as you can be. Therefore, when you’re preparing your budgets, you should try to take into account every pound you’re going to earn and every pound you’re going to spend. Once you get into the hang of it, you’ll wonder how you got by without a budget! And the more accurate your budget is, the better it will work for you.

Step 1

KEEP IT SIMPLE

Get a clean sheet of paper and prepare a list of your periodic income and expenses. Categorise items as either income or expenditure. List things as you easily remember them for example your salary should be listed as an income and your rent, petrol expenses should be included as expenses. You can add more detail as you become more familiar with preparing your budget. Do this on a monthly basis if you are paid monthly. It is also generally easier as most costs such as a mortgage are paid monthly. Doing this on a weekly basis could be exciting to start with but may soon become tedious and unsustainable. So you are encouraged to start as you mean to continue.  

Step 2

BEGIN WITH MONEY COMING IN

Make a list of all your sources of income. Income may be from your primary employment, other forms of employment, rental income, child support, regular financial support from family members to name a few. List the various sources and how much you receive net of tax and other deductibles. You are encouraged to do this on a monthly basis. If you are paid weekly you should multiply your income by 52 weeks and then divide it by 12 months. Similarly if the income is received on a fortnightly basis, multiply by 26 weeks and divide by 12 months.  

Step 3

DETERMINE MONEY GOING OUT

As we all know there are many more things to put in this category, sometimes it  may seem endless, depending on our personal circumstance and choice. To start with refer to the initial list you have made. You can add more items as you remember. The aim is for the list to realistically reflect your monthly outgoings. It is also worth noting that there are some costs you may not be aware of and others that are incidental. Some of the costs you may not be aware of include bank charges for being overdrawn, for withdrawing cash from a cash machine and for unpaid cheques, to list a few. When you start budgeting, it is essential that you gather the necessary documentation such as your payslips, banks statements, bills and some relevant receipts so that the budget is reflective of your financial situation. You may also end up saving a lot of money by querying some of these charges with your bank and/or credit card provider.  

Step 4

MATCHING CONCEPT

We hear in the news how much profit the big multinationals and blue chip companies have made in a specified period. They are able to ascertain this by ensuring that their income and their expenditure all relate to the same period. On a personal basis we need to be able to match all our monthly income to all our outgoings. This means that if you have expenses that are paid weekly, bi-weekly or quarterly you need to prorate these costs so that it is the monthly portion that is recognised in your monthly budget. By doing this matching exercise, it will be possible to determine if your monthly income is enough to cover your monthly expenditure. If some of your costs fluctuate and you are not able to determine exact figures for them, use a realistic estimate.  

Step 5

CASH AND OTHER EXPENSES

There are some expenses you may find it difficult to determine how much you spend on them. Examples of these are your lunch, drinks when you are out with friends, cinema and lottery tickets. You can initially make an estimate if you are not sure so that you initially complete the budgeting process. In order to make this precise it is worth recording such expenses over a period of time to see how much you really spend. You may be in for a surprise when you analyse your costs.  

Step 6

PLAN FOR THE UNEXPECTED

Include categories in your budget for unexpected situation such as illness or decide to have an insurance to cushion you for such events. Though having insurance helps it is still prudent to set some amount aside regularly for the unexpected.  

Step 7

SAVING

Savings is money you put aside for a specific purpose and may generate some form of interest depending on the type of savings account. When you draw up your budget, include a category for holidays for example because a lot of us go on annual holidays and tend to pay for these breaks with credit cards. It is more constructive and a lot cheaper to save on a periodic basis and spend the money once it has been accumulated. This would ensure that you are not in debt and would also assist in reviewing other areas of your spending. The quicker you pay off your debt and start saving and investing the quicker you can achieve your financial goals.  

Step 8

RECORDING, EVALUATION AND AUTOMATION

Now that you have set the budget, you need to start monitoring how accurate it is by matching your actual costs to it on a monthly basis. You can use the income and expenditure statement to prepare your budget and the net worth statements to get started. When you have done your budget you can then begin to do some real evaluation on a periodic basis. If your monthly outlay on cinema, drinks and other forms of entertainment exceed your rent and travel or savings for example then you will be able to make adjustments.