Just like watching your diet helps your body run in top shape, budgeting helps your money work for you. Your budget is a plan for what you are going to do with your money.
If you’re like most people, more money flows out a month than flows in. The only way to get financially healthy is to set up a realistic budget to help you manage your money.
How do you begin to budget?
Step 1 - Track your expenses for a month
Spend a month carefully writing down all your expenses. That means every debit order, debt you’re paying off, that chocolate you just bought - every cent spent must be written down. This will give you a clear idea of your spending habits. Don’t forget to include fixed expenses like rent/telephone/electricity.
Step 2 - Look at your expenses and categorise them
Once you have a clear idea of your spending, you will need to calculate how much you have spent. Then have a look at your salary. No matter who you are, there’s going to be room for improvement in how money flows out of your account.
To work out your amended expenditure it is always useful to keep in mind whether the thing you are budgeting for is:
- an Essential Expense (something that has to be paid for survival – like rent and utilities),
- a Non-Essential Expense (something that is necessary, but flexible like food/telephone/insurance), or
- a Luxury Expense (something that you would like to have but do not need - like TV packages).
You should also be budgeting at least 10% of your salary for savings each month to build an emergency fund in case you need some extra money down the line. Once you’ve worked out the amended expenditure, all you have to do is stick to it!
Step 3 - Use a budgeting tool
There are many budgeting tools online, even apps! Add all your expenses, income, etc. to the budgeting tool, or if you're old-fashioned, to a spreadsheet. This will help give you a full view of your budget and, in most cases, you can save the file for future reference. Just like you should check your credit report regularly, you should also make it a habit to check your budget.
Make it a monthly habit to check your credit report and to review your budget!
Sticking to Your Budget
Make sure your budget is realistic – don’t underestimate your expenses – rather round up when you budget. Also, don’t make it so tight that you cannot stick to it.
Have a look at your Non-Essential Expenses and see where you can improve them by finding better deals. Yes, you need car insurance, but you don’t need to pay an arm and a leg for it. See where you can find providers that give you value for your money.
Check how much money you spend on credit facilities on your credit report. Try to keep your debt lower than 15% of your incoming money and try to keep your total credit spend less than 30% of the maximum amount.
Revise your budget!
Remember: this is not set in stone; you can change and fix your budget as many times as you like until you’re 100% sure it works for you.
Once you have a good idea of what your finances actually look like, it is much easier to control them and bring them to a healthy place. A budget is only helpful if you can stick to it!