People all over the world are up to their eyeballs in debt, and are buckling under the constant pressure to make ends meet. The recession is not helping much. If one analyses the situation, there is one main reason for this. It is because people spend more than they earn. This sounds simple – it is, but somehow people do not know how to manage their situation.
The remedy? …. Prepare a budget!
In simple terms, this is a plan that keeps track of both incoming money – your earnings- and outgoing money – your spending. This helps to focus one on where one spends money and where one can cut down. It also helps to determine what ones priorities in life are and assists in working towards these.
Let me make a bold statement….
Budgeting will change your life!
Let’s get to it.
1. Gather Information
Find all your bank statements, clothing accounts, investment documents, water and electricity bills, telephone, cell phone and and other accounts, etc.
The more data the better, so any information about any expense or source of income is important. More is more!
If you cannot lay your hands on all documents, please do not worry. Rather get the process going, even if it is not perfect. You can always fine tune your budget at a later stage when more information becomes available.
2. Determine your Income
This will include things such as your after-tax income from your payslip or other earnings, interest on savings and investments, benefits, tax rebates, rental income, maintenance cheques, etc. Document this total as a monthly amount.
3. Determine your expenses
Expenses can be broken up into fixed and variable expenses. It is important to differentiate between these and to keep them separate for budgeting purposes.
- Fixed Expenses
These expenses stay more or less the same every month and may include things such as repaying your mortgage or rent, car payments, internet, insurance, cable, tuition, child support, maintenance payments, garden services, maid, medical aid and magazine or newspaper subscriptions.
Some of these expenses are essential and hard to cut back on, while slashing others will be easier. Try your best, because by cutting a fixed expense you'll continue to reap the benefits month after month.
There are two ways to reduce your fixed expenses.
The first is to eliminate everything you don't need. Do you really need Cable TV or FHM? Is your newspaper subscription worth it when you can get the news online, for free?
The second method — often overlooked, but equally important — is to contact your service providers to negotiate paying less. You can, for example, compare quotes from various insurance companies and switch if your current insurer can't or won't match the best offer you found. Shop around and compare costs.
Although savings is not strictly speaking an expense, it will help you get ahead if you regard it as such and adopt the attitude of paying yourself first instead of waiting to see what is left – you will find that there is mostly nothing left unless it is planned.
- Variable Expenses
These change from month to month and include things like groceries, toiletries, cigarettes, alcohol, petrol, restaurant meals, movies, clubbing, etc.
This is a very important expense category as it's often easier to cut back on these than those that are fixed.
4. Determine all large, infrequent expenses
These are often unexpected, but inevitable costs such as car and home repairs or purchases like computers and so on. This category also includes large and infrequent, but expected, expenses like Christmas presents and holidays.
If your last holiday cost you $2 000, then take this amount and divide it by 12 to reach a monthly amount that is easier to compare with your other expenses and income.
5. Total your monthly income and expenses and make the necessary adjustments.
You must spend less than you earn and if you do it's a good start. If you're spending too much, start with each variable expense to find where you can cut. Since a lot of these expenses are nonessential it shouldn't be too hard to shave off a few dollars. Don't stop there: take each item on your fixed expense list and see where you can spend less.
