Here’s another great article in our series on which 10 bad habits to stop to save money…or make more…just have more 🙂 Enjoy 🙂
How many of us budget? The honest answer is, probably very few. Why? It is crazy to expect to be financially secure if you do not budget. No business would operate successfully without a budget and our personal or family income is no different.
Why do you need to budget?
It is quite simple. If you do not understand the relationship between the money that you bring in versus the money that goes out you are never going to get on top of your finances. You will most likely drown in debt, pay a lot more than you need to, and suffer a result.
A budget will give you a clear picture of where you stand and where you are going in terms of money. It will allow you to reduce costs, save money, and enjoy greater financial freedom.
What is a budget?
It is actually quite simple. It is really an account of what money you earn compared to what you spend.
One side, you will have all of your or the household’s income. On the other side will be expenses. We will go into more detail a bit further on.
How to make a budget
The first step is to take an honest realistic look at your income, the money you earn. If you have a family, all members should be included, even if they do not earn an income. You want them to understand the process, the importance, and the structure of the household budget.
- Income
You must be honest when making the budget. If your income changes from month to month, look at the bad months and do not try to base a budget on only the good months. This is very important.
You need to deduct basic things such as tax and other expenses if these are paid. In other words, you want your budget to show the amount of money paid into your bank account after all deductions.
If you receive other income, include it. Again, be honest and realistic. If it might stop or slow down, rather leave it out.
- Expenses
Yet again, you need to be honest and realistic. Many people have no idea of their real monthly expenses. The easy way to do this is to track them for a few months.
You have two types of expenses:
Fixed expenses
- Rent/Bond repayments
- Vehicle repayments
- School fees
- Loan repayments
- Insurance
- Medical aid
- Investment plans
- Credit cards
- Store cards
- Other debts or accounts
Other expenses
- Electricity
- Water
- Food
- Clothing
- Transport costs
- Cellphones/Airtime
- Medical needs
- Entertainment
- Other expenses
Not all of these will apply equally to all people and the list does not have all the expenses we have to face every month. You have to be as accurate as possible if the budget is going to help you.
There will always be something that you did not think of so always budget for sundry costs or other expenses as we called it above. Sadly, most months will give you a new expense that you did not plan for. You need to budget for these as they so happen.
Remember that some costs might be annual so even if they are not in your monthly budget, you need to plant for them.
Set goals
When making your budget it is important to set financial goals. It might be getting rid of debt or saving for something important. This has to be built into your budget.
Savings
Following on from the above things you need to build into your budget, once you have it under control, is savings. You want to have short, medium, and long-term savings.
Short-term savings could be for the deposit on a house, a car, or a good holiday. Medium-term savings might be for a child’s education or to start a business. Long-term saving is normally for retirement. This is when you are too old to work and need money to live on.
All of these are important to think about. Spend some time thinking about the plans you have for your future and that of your family and loved ones. This will guide you in terms of savings.
Most people do not plan properly for retirement and either live well below their normal lifestyle or rely on family, or both. It is important to put money aside to enjoy your retirement.
The main thing about saving for long-term goals is that the sooner you start the better. The power of compound interest is amazing.
Monitor your budget
Once you have spent the time and thought to make your budget, you need to keep an eye on it. Look every month. If you are spending more than you earn, you need to make quick changes.
If you are not reaching your saving goals, see where you can spend less money. At times, you might also want to look at where to earn more money.
If things do not look good, you need to make changes. The budget is a plan to help you improve your finances. If things look bad you either need to make more money, which can be tricky, or spend less. It is as simple as that.
Final thoughts
A budget is important for any person or household. It will give you direction when it comes to money. When you have no plan it is easy to make mistakes. A budget is a financial plan that will help you improve your finances.
Send a bit of time looking at your income and your expenses and then make a budget. Watch it closely every month and make effort to meet your goals. You will look back and be very happy that you did.