It is always a good idea to have at least a simple budget to manage your income. In difficult economic times, a personal budget is especially important. In this article we describe the basic steps you should take. You do not need accounting software — a paper notebook and a calculator will be enough.
This process may sound so simple that you start wondering what is missing. In reality, a basic budget is quite simple: it just requires you to invest a little bit of your time in creating it, and it requires that you make a commitment to review it on a regular basis.
Sources of Income
The first step is to identify all your sources of income. These might include:
- Take-home pay
- Part-time/casual hire income
- Investment income
- Rental income
- Government assistance
- Disability benefits
- Pension income
Of course, not all of the above sources of income will apply to you; the point is to try and identify all sources, even if they are the occasional payments for jobs you do on weekends.
Make a list of your income sources, noting the amounts and how often you receive them.
Now you know where your income is coming from, it is time to look at where the money is going. Deal with fixed expenses first.
Fixed expenses are those payments you make on a regular basis. They are generally made because you have a contract (rent, insurance) to pay them, or an official body requires them to be paid. Draw up a list of your fixed expenses, noting the amounts and how often you pay them. Fixed expenses might include:
- Rent for accommodation
- Mortgage payments
- Vehicle payments
- Student loan payments
- Insurance payments
- Property taxes
Variable expenses are expenses over which you have some control (e.g. you can buy clothing less frequently, or reduce your TV bill by dropping premium channels). Draw up a list of your variable expenses, noting the amounts and how often you pay them. Variable expenses might include:
Medications might be a fixed expense (important prescriptions you must take) or it might be variable.
Now that you have identified your income and your expenses (and hopefully income is greater than expenses), you can start looking at what you are spending to see where you might be able to reduce your expenses.
If nothing seems to be an obvious candidate for reduction, get yourself a pocket- or purse-size notebook and note down everything that you spend. Do this What can you cut without much pain?for at least a week — if you can stay disciplined, do it for a full month. Review what you are spending and ask yourself if all those expenses are really, truly necessary. Do you eat out at lunchtime? Could you pack your own lunch and save some money? Are you addicted to those expensive coffee shops where the counter staff call themselves “barristas”? You may be surprised, how much you can cut out of your daily, weekly, or monthly spending and not really notice the difference in your daily life!
You are creating a budget for a purpose. The purpose may be short-term (eliminating debt on your credit card, or setting some money aside to do home improvements, or take a vacation) or they may be long-term (saving for retirement; saving to buy a home). Only you know what your objective is. Write it down!
Pay Yourself First
You may have heard this expression but not been sure what it means.
By paying yourself first, you set aside a certain amount of money each month as savings.
It is a good idea to set up a separate account for this; one which is not too easy to withdraw from. If your bank or financial institution facilitates it, set up the account so that money from your regular account is transferred to this account right after each regular payment from your employer.
To stay disciplined, you need to review your budget at least once a month. Take a look at your actual expenses and income for the month, and compare it with your budget. Doing this will help you maintain a focus on the budget, and potentially find ways to reduce your expenses further. Make this a ritual — perhaps review last month’s budget on the first day of each new month.
If you can start and maintain a budget, you will find your financial life becomes a lot easier because you will know how much you have to spend and that you are working towards serious objectives. It is a lot nicer than living day-to-day and never being quite sure if you will have money at the end of the month!
Rainy Day Fund
Once you have your personal finances under control, set aside some money for an emergency, such as an accident, illness, or in case you lose your job or source of income. Most financial advisors suggest you try to keep at least three months’ salary in savings to cover your costs in the event of an emergency.