One of the common statements that most of my clients will put in front of me, when I would to suggest them to go ahead with the plans, is that they do not have the budget to support, though knowing that they need the planning.
As such, my financial planning tip #2 is “Learning How To Set A Budget”.
Learning how to set a budget is very important as it’s a great way to reach your financial goals like saving for a new car or even to pay off your credit card bills in three months.
To basically know what’s your and whether you can set a budget, you will need to know a few key pointers like the “In’s” (your income) and the “Out’s” (your expenses).
Generally the “In’s” is very straightforward – if you are working, collecting pocket money or rent and therefore getting “paid” each month, this amount (after tax, if any) is your value for “In’s”
For the “Out’s”, it will be slightly more complex, as the lifestyle of any individual is always different.
I know, most of the time, many financial planners will just ask you for a general figure like roughly how much do you spend per month and your current income – therefore the difference is then your budget!
This general figure is sometimes not very effective as it does not hit you on the head – many people do not actually know that they have usually spent more than they earn, therefore they are constantly in the feel that the difference (earning vs spending) is positive for them.
So if you are concerned for your future, it’s good to sort out your spending in a month and see for yourself if you do have a budget to plan for your future.
If you do not have a budget, read further on as I share a few ways to get started on budgeting.
List of Items Under “Out’s” (please note the figure to put down is on a monthly basis and is applicable for young adults to family)
- Your Regular Savings (if any, preferably money not to be touched): __________
- Debt repayments (e.g. credit cards, study loan, mortgage loan, hire purchase): __________
- Car Expenses (petrol, road tax, insurance, maintenance): __________
- Insurance (personal, on partner’s life, medical, home): __________
- Rent (if you are staying not in your own property): __________
- Education (your children’s or your own school expenses, uniforms, fees, textbooks) __________
- Utilities (Electricity, Gas, Water, Telephone, Mobile Phone): __________
- Food (Supermarket expenses, Eating Out – Breakfast, Lunches, Dinner): __________
- Childcare (nanny, babysitter): __________
- Clothing / Personal Grooming (hair cuts, toiletries, clothings): __________
- Healthcare (monthly consultations to doctor, dentist or prescription): __________
- Alcohol / Cigarettes: __________
- Donations (you are one kind-hearted person to your school, church or charity): __________
- Entertainment / Recreation Activities (high class dining out, bars and clubs, Gym subscription, outdoor recreations, movies): __________
- Gifts (birthdays, promotions, special occasions – friends and family): __________
- Holidays (short breaks, annual holidays): __________
- Any other expenses: __________
As you can see from above, asking you for a general spending figure will not really do you justice – if you do this planning on a monthly basis, you are in a better state to know your current financial status.
From the above list, if you have already gotten all the values you need, your available budget will then be:
>> All Your Income (after tax, if any) – Total Spending = Available Budget
If you have a negative value for your budget, then you may want to consider these two methods of budgeting:
- Pay yourself first before going ahead to spend everything you have earned. Decide on a fix portion of your monthly income that you will be using to save or use to settle your debt. After this set amount, observe how the rest of your spending works out for you.
- Go through the list of your spending and see where you can make changes. See if there are some items which you may substitute for cheaper but same enjoyment, e.g. local coffee instead of getting your daily dose from Starbucks or Coffee Bean. This bit of scrimping and saving will actually help you slowly improve on your financial status and make you feel great as well!
In summary, if you seek to be in a better financial position, achieve your goals faster, or better retirement, plan yourself well with a positive and healthy budget. Create a list of items that you will spend in a single month. If it’s negative, you may want to consider using either one of the two methods of budgeting to help improve. Remember, having a budget and maintaining that budget (to make your money work harder) is a great way to reach your financial goals!