Budgeting is simply the act of working out how much money you’ve got coming in (EARNINGS) and then as accurately as possible figuring out how much you have to pay out (EXPENSES) on fixed costs such as rent, bills and so on to then come up with how much you’ve got left to spend on everything else (DISPOSABLE FUNDS/INCOME).
In simple math terms basic budgeting looks like this:
INCOME + FIXED COSTS = DISPOSABLE INCOME
Budgets can be calculated over a variety of time periods, such as a month, term or even a whole year. Most students have very fixed incomes made up from their Maintenance Loan or Grant, plus whatever they may get in the way of parental support or from a part-time job, so calculating income is usually pretty easy.
The trick comes when trying to figure out your expenses, breaking it down into the fixed costs that are known (for example rent is a ‘known fixed cost’), those fixed costs that are estimated (such as utility bills which can be guessed at based on how much was paid in the previous year) and then essential costs but based on educated guesswork. How much you are going to spend on food per month would be an example of an essential cost.
It’s also important to be strict with yourself about what are and what are not ‘essential’ costs. Whatever is left over after covering your essential costs what you are going to have left to pay for everything else.
Everyone is different, the important thing is to take full stock of your personal income and expenditure – being as honest as possible – and seeing if it leaves you with any money left over. If it does then it’s a case of making that remaining disposable income last (i.e. not overspending). However if after drawing up your budget you have more money going out than you have coming in then you only have two responsible alternatives: You can –
- Increase your income.
- Reduce your expenditure.
It can be difficult to track the small daily expenses (such as cups of coffee, sandwiches, car parking and so on) so here are a couple of tips to help.
1) Pay cash: Debit cards are very easy to use for even small purchases nowadays and you can spend money on them without ever really noticing the total impact on your bank balance. So take out a fixed lump sum of cash each week and commit to only using that cash for your ‘impulse’ spends on a day to day basis. You’ll realize how quickly you’re burning through your disposable income!
2) Cut back: Why pay for coffee when you’ve got a thermos flask or for sandwiches from a shop when you can take in a packed lunch? The simplest way to manage impulse spending is to stop it altogether or reduce it to an absolute minimum. Changing habits can be challenging but the savings can be rewarding.
We have been discussing a lot of way on how to resolve financial concerns and paying off debts. Reiterating here some ways in handling our finances and resolving debt problems… Some may experience different levels of financial mismanagement, from the basic debt problems to the near-bankruptcy, and to the declaration of bankruptcy.
> Assess Your Financial Situation. – Determine your living expenses, other expenses and your regular monthly debt payments. Compare your expenses with your monthly total income. Make sure you know exactly how much you owe.
> Sustain a Realistic Budget Plan. – Create a worksheet to write your monthly expenses. Write where and what you are spending the money for. These expenses can be fixed such as: housing, utilities, child care, loans, etc.; or flexible expenses which vary from weeks or months (unexpected emergencies, medical bills, restaurants/recreation-health activities/entertainment, etc.). Once you see where you are spending funds at, you will have the ability to take control on where you will redirect your expenses at, thus, ability to take control of your finances.
> Recognize the Difference Between Wants and Needs. – Create a healthy budget by taking care of your NEEDS first – food, housing, clothing and transportation. Money should only be spent on WANTS after the needs have been met.
> Never Allow Expenses to Exceed Your Income. – Do some adjustments on your budget according to your income. Evaluate the importance of expensive luxuries such as cell phones, cable TV, or even your designer clothes and other accessories.
> Pay Bills on Time. – Having and maintaining a good credit rating and avoid late charges, which could all the more put you in deeper financial trouble. If you are unable to pay your creditors, call and explain your financial situation and set up a reasonable payment arrangement.
> Use Credit Carefully and Wisely! – Determine what you can comfortably afford to purchase on credit by reviewing your budget. Don’t allow your credit payment to exceed 20% of your monthly paycheck. Pay more than the minimum on charge accounts. Add a few extra dollars to your payment. Avoid borrowing from one creditor to pay off another. Make a conscious effort to use paper (actual dollars available) not plastic (credit cards).
We may have a lot of options in making your financial and funds management work; BUT, it will only YOU who will determine all these plans become a success.
Act on it, make it a habit, and be aware of your spending, at all times.
From my previous blogs, you have been reading various ways on how to save and get out of your financial woes. Once you follow and focus on those tips, it is important to make sure you turn them into habits so that you are assured of better finance handling.
Here are some tips on money mistakes to avoid:
- Splurging more than what you actually earn – The root of most financial problems is the inability to control spending. No matter your income level, if you spend more than you earn you will be broke and in debt. Whether you earn big or not, always bear in mind to be frugal about spending. Spend LESS than what you earn!
- Review your annual finances – Having money mistakes is “fine” for a certain period of time, if you are not aware of it. Real issues start when the mistakes are not properly address over the years. Taking time out to review your annual finances could help you ward off any problems that may affect your financial stability. They say ignorance is bliss, but it can cost you dearly!
- Paying extra for convenience – It may be a breeze to justify spending your funds when it is at your convenience and disposal. Good example is, you don’t plan out your budget for meals; hence, you tend to eat out, at your convenience! Anywhere you go is convenience, even up to your bottled water and coffee on-the-go. Paying for convenience is fine, but do it all the time and in excess and you will always wonder why you never got ahead financially.
- Warding-off tough decisions – “Life is unfair” at times. Sometimes your finances go down or just disappear suddenly. In times like this, you can try to finance the gap between what you make and what you spend, start cutting items from the budget. Bottom-line is, you have the basic necessities in life: food, water, shelter, clothing, education, excellent health, and a way to generate income to live by, then you will be fine!
- Spending on impulse – Huge mistakes to many people is buying on impulse. You see something that you really fancy and dreaming of having it for yourself could ruin your good judgement on your budget. Then, a few days later, you regret buying it since it is not really needed, such a waste of money! Before making a purchase, sleep on it.
- Paying bills without scrutinizing details – You might think it is but normal paying bills without checking the details of your bill. Every bill you receive has a summary of the charges and then a breakdown showing what you were charged. It is easy for companies to have data entry “mistakes” that throw an extra charge in on your account. If you don’t review the bill it can easily slip past you. Be sure to check the actual statement to make sure you were charged the right amount.
If your income is limited, it is necessary to have a household budget. It may sound restricting to have a living budget, but it will help you work out your finances well. Having a workable family budget is actually quite liberating. It makes you in total control of your money, rather than letting your money control you.
> Keep Track of Your Spending – Before you can start a workable household budget, you have to know where you money is headed. It may be inconvenient to track and keep all the household receipts, but this will give you’re a clear picture of what your household actually spend and where you money goes.
> Work on a Budget – Implementing on a workable budget is the most important thing a low-income family will need to do in order to control their funds. Each member of the family should have an input on how to go about working out on a feasible budget. If all the family members has a say in working out on the budget, all are more likely to buy into maintaining the budget.
> Ample Budgeting – This is to make your household budget work in ensuring it is sufficient for the family needs. This is the time in the budgeting process when you might have to make some tough decisions, particularly if your income isn’t sufficient to meet all of your needs, much less your wants.
> Make Adjustments – If the budgeted expenses exceed the income, adjustments are needed. You need to re-evaluate if you need to increase your income, OR cut down on your expenses. However, increasing your income may not be an option in cutting your expenses because it will take some time to become effective. For example, you might discover you don’t earn enough money to support the amount you’re paying in rent. You might need to find a cheaper home or apartment but breaking your lease is expensive, so you might be better off moving after your lease is up. You might need to sell your gas-guzzler and buy a more fuel-efficient car.
> Emergency Funds – Typical knowledge says you need three to six months’ worth of living expenses saved up for a rainy day. When you live on a low income, every day is a rainy day, so saving th
If you are on a low-income budget, you should have a family or household budget. Living on a specific budget may seem to be a bit constricting, but it will definitely work. Having a workable family budget is actually quite liberating and simple. It makes you in charge of your money, than allowing money to control your life.
Monitor Your Expenses – Before you can create a workable household budget you have to know where your money is going. Every member of the family should get a receipt for everything being purchased. Use these receipts to get a clear picture of how and where you spend funds. Create a personal finance tracker can help you monitor your expenditures; you might find some obvious expenses you can cut right away.
Write a Monthly Budget – Implement a workable budget is an important thing in a low-income family, to get control of the funds. Getting a consensus from every member of the family will help in leaving out budget items. Every member of the family is affected by the total family budget, so it should be a family “affair”. Having extra sets of eyes on your budget always helps if everyone has a say in creating the budget, they are more likely to buy into maintaining the budget.
Sufficient Budgeting – Making your household budget work is ensuring it is sufficient for your needs. Be sure to set an amount for each expense, i.e. food, bills, transport/gasoline, loans, etc… This is the time in the budgeting process where you may need to make some tough decisions, particularly if your income isn’t sufficient to meet all of your needs, much less your wants.
Work On Some Adjustments – If your budget exceeds your income, it is important to make some adjustments. You only have two options: cut your expenses or increase your income. Increasing your income might not be an option and cutting your expenses could take some time. You may need to find a cheaper home or apartment but breaking your lease is expensive, so you might be better off moving after your lease is up. You might need to sell your high – gasoline consumption car and buy a more fuel-efficient car.
Emergency Fund – Common wisdom says you need three to six months’ worth of living expenses saved up for a rainy day. When you live on a low income, every day is a rainy day, so saving that kind of money might seem unrealistic. But unexpected expenses come up in everyone’s lives — regardless of income level — and having a few hundred dollars in an emergency fund can meet those needs without wrecking your budget and forcing you into difficult choices. Noel suggests making your emergency fund a top priority, right after creating your budget.
Some people assume that you have to cut spending in every possible area to save the most money. If you have incredibly high willpower, that may be true. For everyone else though, spending some money on your high priorities helps keep you sane and allows you to maintain a stricter budget in other spending.
> BUDGET – When you’re trying to get out of debt and/or take control of your financial picture, you have to start with a budget. That’s because a budget is what you use to plan how you want to spend your money and how much you want to save. By following a budget, you harness the power of your money so you can reach your financial goals whether paying debt or just want to save up for some funds for your future goals or retirement plans.
> SAVE MONEY ON EVERYDAY EXPENSES – In order to successfully follow your budget, you’ll need to find opportunities to save money. Start from your groceries, utilities, transport and leisure. Make sure to keep track of your daily expenses and it is also wise to make price comparatives on any regular items that you buy.
The tough calls come with the purchases that give temporary satisfaction such as your daily latte or your fast food fixes. You may justify that those purchases are worthwhile since they at least make you happy for a short while. Is that very brief satisfaction worth paying more interest on debt or limiting your savings? Maybe it is that important to you, but chances are it’s an expense you can reduce.
> HOLIDAY EXPENSES – Carefully plan your holidays by booking your flights and accommodations early. Check online any low cost but practical ways for your next planned vacation.
If holiday budget is really tight, you can set up a staycation and enjoy some time to relax and rest with your family and friends, create interesting group activities.
> CREATE GOOD BUDGETING PRACTICES – Once you have established your budgeting behaviors, make sure that you tediously follow or stick with your budget. Avoid being tempted in any impulsive purchases or expenses. Depending on your financial situation, you may need to make some sacrifices. At the same time, you don’t want to let your budgeting prevent you from enjoying the things you love. Unless your situation is particularly dire, you do need to leave room for your major priorities. If you are in a very bad financial situation though, it’s probably time to make greater sacrifices at least temporarily.
> EARN EXTRA MONEY TO HELP YOUR BUDGET – You can work extra hours, do yard sales out of your stuff that is no longer being used, check tax refunds, or establish a small business. Proceeds can be used to cover some debt, or budget for your next purchase or holiday. Being wise and creative on how to earn extra funds will ease that financial burden out of your shoulder.