Personal finance is exactly that: personal. Like one man's meat, ideas for money management, strategies and styles are individual - what works for you may not work for someone else. Choosing a budget plan for yourself from the multitude available may still require personalisation: you have to tweak it till it fits.
Budget planning is done in two parts. Part one is determining the how; part two is the what.
How To Budget
Begin your budget planning by considering four main budgeting styles and choosing which best fits your style.
The Classic Category Method
The classic budgeting style assigns a fixed spending limit on each of your expense categories - such as Food, Entertainment or Transport - for the month's budget. Once you have hit your limit for the particular category, you are done for the month.
The Zero-based Method
This is a budget style for the regimented and organised mind. Every dollar, pound, euro, etc. of the monthly income is accounted for in your budget plan. There is no 'left-over' or extras: the aim is to get your spending down to zero each month. The zero-based method requires you to plan your spending limits in advance, and the willpower to stick to it.
The Envelope Method
The envelope system is based on the classic category method with one difference: it requires you to pay for things in cash. After taking care of priority categories (rent, utilities, retirement contribution, etc), assign to each of a series of envelopes a category, spending limit and its fund of cash. Once you've spent the amount in an envelope, you may move cash from another envelope across, but you may not draw out more money from your account. What is in the envelopes is your limit for the month.
The Priority-based Method
Automate everything important, such as the rent, utilities, retirement contribution, etc. Cover all important and required priorities. What is left is the amount you can spend as you wish, until it has gone. This method allows you the security of always covering all your financial priorities, and the freedom of not having to set up categories for the rest.
When you have decided on a suitable method, you can follow these next steps to determine what goes into your budget.
What to Budget
- Get organised. This is the part where you gather all the necessary paperwork and documents you will need to plan your budget. These will include:
- several months' worth of bank statements
- recent credit card bills
- copies of your household bills
- copies of your medical bills
- details of your savings and pension/retirement contributions
- information on any other sources of income
- Add up your income. Make a list of all income, savings, investments, self-employment, rent from properties you own, and anything else, after deducting compulsory payments such as tax or national insurance. Add any weekly, yearly or sporadic earnings as well, such as dividends from shares. Separate your regular/monthly and irregular/annual earnings into columns, then calculate overall totals for each income trajectory, as well as a 'yearly earnings' figure. This is also a good time to check that you are paying the correct amount of tax. ASIC's online budget planner may help you with this and the following stages of determining what goes into your budget.
- Work out what you are spending. Look at your bank statements, credit card bills, and household and medical bills to determine where your cash is going. Be realistic and avoid guessing. The more accurate your figures, the better your budget plan is going to work. Remember to account for occasional spending such as vacations, festival gifts, birthdays, insurance policies, car maintenance and tax, etc. Add these costs to your list of expenses in a separate 'yearly/occasional outgoings' column. Once you have included everything you need to, add up your monthly and occasional spending separately into two totals. Next, calculate an overall figure that incorporates all your yearly expenditure. If you divide this number by 12 and check the difference between your result and the 'regular spending' total, you will see how much money you need to earmark each month for 'irregular' spending such as gifts and car insurance.
- Compare incoming and outgoing. You now examine your income and spending totals against each other. Subtract annual and monthly expenditure totals from annual and monthly income figures. The result will indicate the yearly and monthly surpluses or shortfalls in your finances (a shortfall will have a negative number).
- Draw up your budget. Base your plan on the budget method you have chosen. Be as realistic as possible when budget planning. Balance detail and practicality. Your plan should consist of what you intend to spend each month on priority items, and in some cases each year. Keep in mind, however, that there will always be unforeseen costs, or emergencies. Once you have your budget plan, remain as faithful to it as you can.
Added Note. Financial planners will often advise you when determining your expenses, "First, pay yourself." When determining your spending, allocate some percentage of your pretax income for yourself. Ten percent is a good figure, if you can manage it. if you receive a paycheck via direct deposit, arrange to have that percentage of your paycheck deposited into a separate savings account, so you don't even see it right away. If direct deposit is not an option for you, set aside that percentage and deposit it into your savings account manually. Do this religiously. A little will add up to a lot over time. Additionally, don't forget your retirement. Creating a retirement nest egg can give you some peace of mind in your golden years.
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