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| Your Personal Finance |
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by
Thomas Munthali, 25 June 2006
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07:09:51
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Building your budget
The pain of budgeting can come from two sources: firstly, the time and effort needed to start and maintain the budget; and secondly the financial sacrifices that may be necessary to put the budget into force.
A personal budget is a tool to help you to reach your financial goals. It is intended to be an organised way of comparing income and expenditures over a relatively short time frame (a week, month, or a year). It should allow you to forecast your income and expenses, monitor your progress, and make changes as needed to achieve your goals.
For example, I was in the habit of keeping sales receipts so I could track where each of our family pennies went. The goal was to know how much we spent on various household components like food, groceries, baby-related expenses, miscellaneous, etc. I then told my wife to be bringing me receipts of her expenditures.
She remained faithful in this regard for the first two weeks then she started to forget about keeping track of her expenditures all together until she finally joked that she got married to the right man but in the wrong profession (economist).
I guess that was a miscalculation on her part because I went into a whole two-hour lecture on the importance of budgeting to economists and non-economists alike more so to her as an accountant. However, I wouldn’t blame her because keeping track of expenditures soon proved elusive to me as well.
I simply couldn’t keep pace and ended up getting stressed, as I had to make entries almost every day. Nevertheless, I achieved my goal because after three months of tracking our expenditures, I noted that we used to spend too much money on impulse items (miscellaneous).
My guess is my wife was just putting her hands on anything she saw across her path—no wonder she easily got tired of collecting sales receipts. I could be wrong in my guess.
The idea of a personal budget means different things to different people: at its most informal, someone might think of a budget as merely living within one’s means.
That is, if you haven’t completely run out of money by the end of the month (or whatever measuring time period you use), you have stayed within your budget. While we are, for simplicity, calling this a “budget”, it in fact is really no budget at all, because it doesn’t give you any information about where your money went, and it doesn’t provide the structure and discipline conducive to making changes where necessary.
Whatever form your budget takes, it should give you a detailed picture of how money comes to you, and how you spend it, within the reporting period you choose. My recommendation is for you to choose a reporting period that gives the most accurate picture of your financial cash inflow and outflow.
For most of us, this would be monthly, since we get paid monthly and the majority of personal obligations are usually billed monthly. After you’ve selected your time period, you’re ready for budgeting your income and expenses.
It is important to first look at your income sources and amounts before starting to plan for expenditures. Economists and accountants call such budgeting—where the available cash resources determine the expenditure priorities (not the other way round)—as a cash budget.
Many individuals who set up personal budgets only look at the cash outflow (payments), but I would strongly advise you to closely monitor your personal income as part of the budget-creation process.
Along with knowing your incomes, is the need to prioritise your expenditures. Although many would agree that scrutinising personal expenditures is a necessary part of a budget, setting up and maintaining control over expenditures is often what you’ll find most difficult and tedious.
Finally, you can match your income with your expenses and see what needs cutting back, or where you need to make increases.
Next week we will discuss how to make an income budget before considering any expenses.
The more the resources you have accumulated, the more the chances that you will stay within your budget and minimise the creditors’ frequent knocks on your door or indeed never see them again. That is healthy personal finances handling.
—Feedback: tbmunthali@yahoo.co.uk |
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