Budgeting - Part One

Hello,

When I talk to people about getting fully in control of their finances, a major issue that many have is implementing a workable and consistent budget. One of the major contributors to this is their belief that a budget would be too restrictive and not allow any wiggle room. This is more often than not based on precepts driven into them by parents, educators and their peers. The truth is, rather than restricting “wiggle room’, a consistent and well managed budget can actually free up the flow of money, giving more available money to spend on reducing debt and acquiring ‘little luxuries’.

This three part serial of articles on budgeting should provide anyone with the basic principles and skills necessary to develop a successful strategy to get into control of their finances.

Let's go back to basics here. What exactly is a budget?

A budget is a set spending pattern that is modeled on your financial goals. The most important fact here is that it is modeled on your goals, not mine, your parent's, or your friend's - your goals. A budget that is not modeled this way is actually abusive and will do more harm than good.

A successful budget performs the following functions:

• Maintains expenditure at a level less than income
• Eliminates the need to use credit to support a lifestyle
• Releases regular funds for the repayment of existing debt
• Allows expenditure to be tracked

OK, so you want to take control of your spending. The first step is to list the minimum regular income that can be relied upon. This should not include bonuses unless they are at the minimum possible levels and definitely not include tips or other income that cannot be relied upon.   

The second step is to list all essential expenditure. Essential expenditure is what you must spend to continue to live. A typical list would be:

1.  Mortgage / Rent
2.  Home insurance
3.  Food
4.  Utilities
5.  Taxes
6.  Work travel expenses
7.  Essential maintenance
8.  Existing debt payments

Note that this budget includes only items that contribute to living. All other expenses are expressly excluded. These are only added in if there is sufficient income to support them

The third step is to calculate the difference between income and expenditure. We will use this figure in the next part of this series on budgeting.

Good luck!

Comments

[edison]

Great steps to follow!