A budget is a financial plan. It is a list of income and expenditure which will show the amount of surplus cash, or the amount of funding required to be in a cash neutral position, at the end of a given time period.
Many individuals are under the impression that it is only sole trades, partnerships and companies that need to budget. This is a fallacy, as every individual can benefit from preparing a budget to control their own finances. Developing a personal budget is not a difficult exercise, nor is it time consuming. Businesses are likely to have complicated budgets that require a degree in economics to prepare, analyse and control however individuals do not need this level of detail. Any individual, regardless of their qualifications, level of training, profession or education can put together a simple budget that will help them identify their spending habits and devise a plan on how to control them.
Budgeting is a simple concept that makes sense however many people do not prepare written budgets on the premise they will not be beneficial for their specific circumstances. Personally, I find this lunacy as there are many reasons why everyone should prepare a budget.
Debt is a huge problem for many people and it can have severe consequences on lifestyle, relationships and general health. Many people are of the impression that debts are racked up through large one off items of expenditure, such as cars, property and the like. However, this is not the case and it is possible to rack up a lot of debt buying everyday items, therefore every single person is at risk of getting in to debt.
The primary cause of debt is living a too lavish lifestyle for the level of income you earn, i.e. living beyond your means. Sure some people may have a passion for fashion and needlessly spend money on clothes or have a passion for music or film and needlessly spend money on CDs and DVDs, but some people simply spend too much money on the more mundane everyday items, such as groceries. Do you really need those premium brand products? Do those premium brand products taste better and provide more nutrition? Do you really need to buy expensive home grown organic vegetables when the European imports are cheaper and just as good? Spending too much money, regardless of what it is on is living beyond your means and it is important to reign in the finances to avoid getting in to debt.
In order to live within your means you need to take a step back and actually analyse your finances. If you don’t know what is happening to your money how can you possibly know how much money you have to spend on everyday living costs, such as food, entertainment, clothes etc? A budget will focus the mind and get you looking at your finances that will provide the information you need to ensure you are living within your means.
Saving for the future doesn’t necessarily mean accumulating cash for retirement. You may be looking at getting a foot on the property ladder and buying your first house in the next two years. Similarly, you may be looking at buying a car or another expensive consumable in the next year or so and preparing a budget will help you get one step closer to your goals.
The budget will show how much spare cash you have left at the end of the month, and this cash can be put in to a designated savings account. If you are fortunate enough to have a bit of additional headroom you may even decide to provide a specific amount for ‘savings’ in your budget.
The budget can, of course, be used in saving for retirement but in these circumstances it is best to simply provide for your pension contributions in your budget as this a long term investment. Simply seeing how much you have left at the end of the month is suitable for short term saving and not really suitable for pension planning.
It is a sad fact of life, but bad luck happens. Bad luck is not discriminatory and it affects everyone at some point therefore it is advisable to be prepared for it. Arguably, the best way of doing this is to have an emergency fund, which is a pool of cash used for emergency expenditure only.
It is not easy building up an emergency fund and deciding how much cash to put away each month is not an easy task. How much should you save? How much can you afford to save? Can you still afford day to day expenses when saving ‘X’ amount? By preparing a budget you will be able to answer these questions and start growing your emergency fund.
Budgeting is good discipline. Taking control of something as important as finances will demonstrate you have the ability, the desire and the maturity to sort out, organise and plan for life’s other challenges.
It’s a cliché but money really does make the world go round and not having enough can have severe consequences. Everyone needs to live within their means, i.e. match their expenditure to their income, and this is achievable regardless of how much money you earn. Higher earners will have the funds to eat premium brands, take those expensive international vacations and live in large palatial properties and still live within their means, whereas lower earners will have to eat lower branded products, take “staycations” and live in more modest properties to live within their means.