The power of budgeting

Back to Money advice
5 June 2018
Knowing how much you can afford to spend every month is a simple exercise, yet one that most people seem to take for granted and neglect.

 


When you think of a typical budget, it normally includes a list of expenses that you need to cover to survive, but very often it does not include things like your children’s education, a family vacation or retirement.

A sound financial plan starts with a budget that lists not only your living expenses, but also the monthly amount you can save towards your financial goals. 

Budgeting is a powerful financial planning tool that you can easily set up yourself without the need for expert financial advice from a financial planner.

A budget will not only help you guard against falling into a debt trap, but also provides a snapshot of how you are doing financially. A budget gives you control over your finances and sticking to it can help you on your way to financial freedom.

What should a good budget include? 

Follow a simple budget formula 

There is no need for an overly detailed and complicated budget. It is as simple as the following easy formula: All your income minus budgeted expenses (things like food costs, transport costs, lights and water, etc.) minus budgeted savings (kids’ education, a family holiday, a new car, etc.) = spending money or shortfall.

Start by making a list of all your monthly income and expenses, then deduct the expenses from the income.

A practical way to go about this is to look at your bank statement, grab a pencil and make notes of all income and expenses passing through your bank account.

If you have money left, decide how much you want to save with that money and allocate the amount to your various savings goals. The remaining money is yours to spend on yourself.

If you have a shortfall, then you need to make some tough decisions. Look at all your expenses and decide if an expense is absolutely necessary.

If not, then try and spend less on that item, or try and eliminate it from your monthly expenses. An emergency fund is a great way to help you build a nice buffer to take care of those unforeseen little curve balls that life throws at you. As part of your budgeted savings we think an emergency fund is a great idea.

Stick to the budget

If you haven’t budgeted for it, then don’t buy it. Rather set up a new savings goal and build up some funds towards purchasing the item.

Remember to stick to the formula: All your income minus budgeted expenses minus budgeted savings equals spending cash and hopefully not a shortfall.

It will take time, but if you follow the formula you will get ahead and be on your way to reaching your financial goals.

Review and adjust

Keep track of and update your budget at least annually or when circumstances in your life change, like a new job, marriage or the arrival of a baby.

Also increase the savings element of your budget with inflation. When your income increases then increase the budgeted monthly savings in the same proportion. For example, if you get a 5 % salary increase, then increase your savings by 5% as well.  

The old adage of “If you fail to plan, then you are planning to fail” aptly captures what budgeting is all about.

Budgeting is free, easy and has the power to change your life for the better. Start one today and get saving! 

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