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| Your Personal Finance |
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by
Thomas Munthali, 09 July 2006
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07:29:42
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Budgeting your expenses
Last week, we highlighted the importance of determining the income levels and sources as a step that should come before determining the expenditure options. It is only when you know the projected levels of your incomes with the highest degree of certainty, that you can prioritise your expenditure needs.
Anyone who goes about setting up a personal financial budget is usually well aware of the importance of accounting for personal expenses. However, recognising the need to scrupulously account for all expenditures during the reporting period that you choose (monthly, for most people), and actually doing it for long enough to do much good, can be two different matters.
Unless you are the type of person who really enjoys record keeping and working with figures, the process of budgeting for expenses can be difficult and tedious. Hard though this is, the time you spend preparing and maintaining your personal budget can yield real financial gains.
The process of budgeting for expenditures may be broken down into several steps:
Forecast and track
The best way to do this is to look at your monthly bank statement or that notebook in which you record your main expenditures or those utility bills invoices/receipts for the last six months or so, and see how much you spent each month in various categories of expenses such as savings, housing, utilities, phone, car payments, petrol or transportation, insurance, clothing, gifts, entertainment, and whatever other categories make sense for your life.
Don’t forget to account for out-of-pocket—cash expenses that will arise during the month (or other budget period you choose). If you don’t know precisely how much you spend this way, you can start by pencilling in an estimated figure. Then, keep track of your cash expenditures for a month, perhaps by writing them down in a small notebook.
Once you get to the point that you know the actual amount spent, you can replace the estimated amounts with the “real” figures. You may be surprised at how much money dribbles through your fingers this way.
Track your expenses each month, and compare your actual expenses for each category with what you budgeted for that category. Even if money budgeted for one purpose is not spent on that, there’s a real temptation to spend it for another purpose.
Make adjustments
For categories where the budgeted amounts don’t match your actual expenditures, you’ll need to make adjustments. When it turns out that you have paid more (or less) for an item than the amount you had budgeted, you will, of course, want to adjust the amount of the estimated budget expense to agree with the amount you actually paid.
But, this may not be all that is required—other budgeted items (in either the current or later budgets) may have to be changed. For example, if you are dealing with a cost overrun (or unbudgeted item), you may want to consider one or more of the following:
—Decrease amounts budgeted for other items, either in the current or future budgets.
—Increase income, either in the current or future budgets.
—Do nothing, and let the change to the “bottom line” for the current budget (the amount of decreased cash or increased deficit) be carried over to the next budget.
Unlike governmental units, salaried employees or business owners and their families normally can’t run budget deficits for any great length of time. If your personal budget shows you to be running a deficit, you’ll usually need to quickly bring in more cash flow (by increasing income, tapping savings, or obtaining loans) or, more likely, to decrease spending on other budget items.
The other example is when you are dealing with the situation where a budgeted item was either acquired for less than the budgeted amount, or the expenditure was not made at all. Thus, you may want to:
—Increase amounts budgeted for other items, either in the current or future budgets.
—Do nothing, and let the change to the “bottom line” for the current budget (the amount of increased cash or decreased deficit) be carried over to the next budget.
If it turns out that you’re spending less than your income, congratulations! You’re among a very select group of Malawians. My recommendation is that you try to save at least half of the excess cash, for those other times when you might have more expenses than you forecasted.
—Feedback: tbmunthali@yahoo.co.uk
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