One of the first skills to learn when managing your finances is budgeting.
Creating a budget and then using it to manage your money is an important first step in any serious money management discipline. So what is a budget and how can it be used?
A budget is an estimate of your income and expenditure over a set period of time. Most people budget annually.
To create a budget, follow these steps
- List your sources of income and then apportion the income to each month of the year.
- Now, list your expenses and apportion them to the months in which they occur.
- Subtract the total expenses each month from the total income for the month.
Some tips when creating your budget:
- Apportion income and expenses to the months in which they occur. For example, if you earn a salary from your employer then you probably receive pretty much the same amount of income each month. In this case, you can place the same amount into each month. This might be the same for expenditure that occurs frequently. For example, the amount you spend on groceries will probably be the same each month.
- Some expenses might occur annually, bi-annually or quarterly. For example, if your car insurance bill is paid every February, then place the amount in the February column. If you own a home and pay rates quarterly, you might place these amounts in the respective months (e.g. February, May, August and November).
- Some months will have different income and expenditure amounts and you may find in these months that expenses exceeds income. This is OK provided that over the full year, income exceeds expenditure.
If you find that you are spending more than you earn, then budgeting has done one great service to you already. It’s made this fact known and you can now take action.
When we do this exercise, we inevitably find that we are spending too much in some areas. This is the time to begin cutting your spending.
For example, of your dining out expense is too high, then you might have to reduce it each month. This might mean dining at less expensive restaurants or reducing the number of times you eat out.
Once you have a workable budget, the hard part begins: living within it!
During the year, it pays to keep track of all your income and expenses to make sure that you’re not spending above the budget you set yourself. If you can do this and keep within your spending limits, you can be sure that everything will be OK.
It would be great to teach kids how to budget while they’re at school. This is the best time to learn money management skills. If this were done more extensively and effectively, I wonder what the impact might be on bankruptcy and debt agreements each year? I bet it would make a difference.
In summary then, budgeting is a useful skill, tool and discipline that can be very effective in managing your money situation.
