Money, cash, wonga, dollars, bills, pounds call it what you like but it is a sad fact of life that these pieces of paper and small metal coins make the world go around. Like it or not, in this day and age we all need money in order to survive. Some people are good with money whereas some aren’t, but regardless of how much money we have, how we spend our money, how we save our money and our overall attitude towards money, controlling our finances is something that we should all do.
Arguably, the best way to take stock and control our finances is to devise a plan of action, i.e. a budget. A budget is little more than a statement of income and expenditure. A budget is a useful tool that will help us to focus on our finances and identify exactly how much money comes in and how much money goes out. In theory devising a household budget is simple however this is not always the case in practice.
For most people identifying income will not be a problem. The main source of income for most people will be their salary or wage, which will remain constant from month to month. Some people may have rental income, from letting a property or a garage, and since this is likely to be a fixed figure it will not be a problem identifying this either. Other sources of income may include dividends, stock, interest and other investment income, most of which is going to be difficult to budget for. As a result it is best to forget about trying to accurately budget for investment income, unless it is substantial, which for many it won’t be. If investment income is to be included in the budget a good method is to look at investment income received in the previous year divide it by twelve and provide for this fixed monthly amount.
When putting together a budget it is important to list down all items of expenditure. It is crucial not to leave things out as omitted expenses will indicate more surplus cash than you will actually have, which may lead to a few issues. When identifying all items of expenditure it is important to sit down and think, carefully. This is an exercise that should not be rushed. Look at previous bank statements and take note of each payment and the frequency of them.
It is highly likely there will be the same expenses going out each and every month. The rent or mortgage, electricity, gas, credit card payment, money to clear a bank overdraft, personal loan repayments, general insurance, house insurance, car insurance, contact lenses, critical illness and internet costs are all examples of monthly expenses you may have. Looking at previous bank statements will identify the regular costs for inclusion on the budget. You may have some quarterly bills therefore it is best to look at bank statements covering several months to ensure these are identified and not just the last month or two.
As well as the regular bank payments you are going to have other costs incurred throughout the month, each and every month, on specific items. Examples of this may include grocery shopping, vehicle fuel, weekday lunches, travel to and from work, train fares and bus tickets. These costs will vary from person to person and will be more difficult to identify, however it is important to sit down and really think about your spending habits and where the cash goes.
Once all regular expenses have been identified it is time to include other things that you buy infrequently. Examples may include jewelry, clothes, shoes, small consumables, house repairs, family days out, vacations and entertainment. It is not easy to budget for these items and it is more than likely an estimate is going to have to be made.
With all costs identified it is important take a step back and analyse those costs. For many people the main reason for developing a budget is to cut costs, therefore you need to critically look at your expenditure and see if there are any costs that can be reduced or omitted altogether. This is not going to be possible with rent, mortgage payments, personal loan repayments and other monthly expenses but savings may be achievable elsewhere. For example, do you need to buy lunch whilst at work. It is cheaper to make a packed lunch and take that to the office, which is a saving. Do you really need to spend so much money on clothes? If your wardrobe is full to bursting then make a pact not to buy any more clothes for a few months, which is another saving. It is time to cut back to maximise cash and stop wasting it. When cost cutting it is important to ensure that the cuts are realistic and achievable, don’t go overboard.
With the income and expenditure identified it is now a case of deducting the expenditure from the income. Hopefully there will be an excess of income over expenditure, which means you will have surplus cash at the end of each month. Depending on your specific circumstances there are many uses for this excess cash. Those with large debts can use it to make further capital repayments to pay their debts off quicker and reduce the total amount of interest payable. Those with little debts or no debts can use it to buy treats or for entertainment. Those who want to provide for their future can invest it. Whatever you do with the excess cash it is always advisable to retain some of it for “rainy days”, just remember to spend the cash wisely.
If there is a cash deficit at the end of the month, i.e. expenses exceed income, you have problems. Firstly, you need to identify why there is a deficit. If the deficit is the result of having to pay back a loan, a hire purchase agreement or pay off some other debt then you need to look at your budget and see if there are any areas where further cut backs can be made. In these circumstances there may be a need to be ruthless by making drastic cuts and living a frugal life, at least until the debt has been repaid. If, you are living on the breadline and really can’t make any further cuts then you need to seek professional help and fast. Don’t stick your head in the sand and pretend it will go away because it will not, in fact things will usually get worse so act smart and act fast.
If there are no debts to settle and the deficit is simply the result of your expenses being too high then it is evident you are living outside your means and need to change your lifestyle somewhat. In these circumstances you need to critically look at your expenses and see where you need to cut back. There will be many areas of unnecessary expenditure and you can certainly reduce expenditure somewhere, even if you don’t really want to.
So, you have identified all sources of income and looked at your expenditure. In fact, you have scrutinised your expenses and identified areas where cuts can be made. All this information has been put on a spreadsheet and you have developed a budget you are happy with and one which is achievable, so what next?
It is pointless spending time and effort putting a budget together and then storing it in a drawer or on the hard drive of your computer and never looking at it again. The budget is something you should regularly look at to ensure your plan is working and you are sticking to it.
At the end of each month you should prepare a variance analysis, which is a comparison between the actual income received and the budgeted income, as well as the actual expenditure and the budgeted expenditure.
By methodically putting the figures in a spread sheet and identifying the differences it is easy to see where you have stuck to the budget and where there were deviations. In reality it is likely there will be differences, after all a budget is only an estimate. However, it is the size of the differences you need to look at, i.e. where things were wildly over or under budget.
You need to identify specific areas and then ascertain the reason for the difference. Was there an unexpected and unforeseen emergency expense or did you simply under budget? Did you lose self control and make spending you didn’t budget for? Have prices increased and you had not provided for this in your budget? There are a million and one potential reasons and you need to identify them.
Once you have identified the reasons you need to take the appropriate action to ensure it is not repeated. If you budget needs amending to reflect reality change it and then see if the variances are less the following month. The budget is a moving feast that requires constant review and updating. Whilst this may seem to contradict the concept of budgeting, the review process will make you aware of your outgoings and keep you thinking about them which should help you become more financially aware and in control which will help you reduce your day to day expenditure.
Maintaining the budget on a spread sheet will make it easier to read, eradicate any arithmetical errors and allow for easy editing.
Comparing actual monthly income and expenditure to budgeted income and expenditure is also best done on a spread sheet. Simply copy your budget on to a separate page and delete all columns other than the detail and the month you are working on. Add two further columns, one labelled actual and the other labelled difference. It is then a matter of going through your actual income and expenditure in the relevant cells. If you incurred additional expenses that were not on the budget, don't worry, just insert them, Where there are big differences between actual figures and budgeted figures it is worthwhile noting down the reasons why.