In this post I am tackling
the important issue of personal financial budgeting. So what exactly does this mean? Well in this context it requires working out
the difference between your income (what you earn), and, your expenditure (what
you spend), and, it is important in that it enables you to live within your
means, and, ultimately manage your finances in such a way as to achieve
financial freedom.
Although I’m not a big
advocate of life plans in general, as I prefer to let things materialise
naturally, what I am a sworn advocate of is the financial life plan,
and, while the old adage of the earlier you start the better off you will be is
certainly true, it isn’t the be and end all. The fact you are reading this whatever your
age, I beg you to start now. As you will
see setting up a personal financial budget is not complex, and, involves common
sense; however, setting it up initially is time consuming, and, requires a
certain degree of discipline for the recording and monitoring.
Budgeting is not a new
concept, and, is routinely undertaken by companies, in fact you would probably
be very concerned if you learned that a business did not know what their income
and expenditure was going to be (although with some businesses they get it so
wrong it is frightening, however, that is another story.) For your personal budget you will get it
right.
There is also a
psychological issue at play here.
Constructing your personal budget will involve you writing down the
relevant information. This can either be
on a spreadsheet, or, paper (notebook), or both! The key is that it is in black and white,
and, the figures will not change however long you stare at them. This is in stark contrast to your mind. Many people will probably feel that they
spend within their means, but still seem to be utilising their overdraft on a
regular basis. This is because
unfortunately the majority of us have selective memory, which tends to
“conveniently” forget certain information like the cost of several take-aways
each month. This is human nature that
can be overcome by writing things down in an orderly fashion. It also applies to making a list of the jobs
we have to do, or, organising our food shelves / freezer in a neat and logical
way so as to avoid waste. It is usually
the underlying concept of getting things done (GTD) to improve the quality of
our lives. In addition in the case of personal
financial budgeting, once we have completed the initial analysis it will
aid the planning on how best to achieve our future goals, for example saving
for a holiday, without it costing more than the price of the holiday.
The first part of achieving
the personal financial budget is to analyse all your income and
expenditure. The greater detail the
better the results you will achieve when it comes to analysing, and,
potentially altering spending habits.
The following is a very
simple example of a personal financial budget for one month:
| Monthly | |
| Amount | |
| Income | |
| Salary | 1,000 |
| Expenditure | |
| Gas | 75 |
| Electricity | 30 |
| Rent | 450 |
| Telephone | 45 |
| Food | 220 |
| Socialising | 180 |
| Total Expenditure | 1,000 |
| Surplus / Deficit | 0 |
The above is known as a
balanced budget in that the income and expenditure amounts are equal. This person is spending exactly what they
earn. Now don’t get me wrong this is not
a bad position to be in, it is certainly a lot better than spending more than
you earn, however, what about when it comes to booking a holiday? For that month there will be an additional
amount that will be above your normal spending pattern. Where is this money going to come from? Presumably some form of finance, e.g. a
credit card. Then we get in to the
realms of being charged interest (making the thing we purchased more expensive),
and, setting up provision to pay it back.
The other issue with the
above example is that while it is a start, the brevity of the headings will not
help us with our analysis later on. So for
example what does the line socialising contain?
Does it contain a £30 monthly gym membership that we never use? By detailing this figure separately will
focus our minds when it comes to deciding if we need to incur this expenditure
at all.
Your homework now is to start building up your own personal financial
budget. I will be adding to this article
on how we will determine if our expenditure is either essential or
discretionary, with a view to altering our spending habits to put us in a
better financial position. Below is a link to download budget financial planner spreadsheet I have developed.
Please feel free to comment, or tweet me @MrMoanAE. Also check out the video on how to complete the spreadsheet below.
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