Using A Personal Budget To Manage Spending
Are you often short on cash? Are you afraid that when retirement or tuition time comes your savings won’t be enough? Perhaps you think that the answer is to find ways to earn more. However, there are two problems with this reasoning: First, I know plenty of people who earn tons of money but are still neck-deep in debt. Every time they earn more money, they always find ways to spend more than the increase. Second, finding ways to make more money is not an easy task especially if you feel loaded enough with your current work.
Making more money is not enough. You must also know how to manage your spending. You must have a plan on how to spend your money; in short, you must learn to budget. Here are suggested procedures to jumpstart your budgeting efforts:
Establish goals and priorities. While long-term goals are important, short-term needs must be addressed. List them in order of importance. Not only should you rank them, but also write down an amount that indicates the absolute minimum amount that you must pay for them. Do not forget to have a fund for items that need to be saved over a long period of time. While some items like school tuition are unlikely to be forgotten, it is easy to forget to have an allowance for items like car depreciation. When the time comes to replace your vehicle, you may have no cash saved for downpayment.
List in detail your current expenses. Write down daily everything you spend for one month, preferably in a computer spreadsheet for easy number crunching. In doing this, pick a month that is about average so as not to over- or understate expenses. Although this seems simple, it is easy to forget how much you had spent if you pay some or most items with cash. In the Philippines, many establishments still do not take credit cards so a lot of expenses will not appear in your billing statement. The best way to make sure that everything is accounted for is to have a fixed amount of cash which you then reconcile with your expenditures every end of the day. For example, you may have PhP 2,000 in your wallet at the start of the day. Before sleeping, count what remains, and then account for everything—this way you will be able to record all expenses. You may be surprised to discover that small items may add up to a large amount in a year’s time.
Track the expenses that occur only once or rarely during a year. Some large expenditures do not occur monthly. Examples of this are tuition, down- or full payments to a car or home, and Christmas-related expenses.
Separate expenses into fixed and variable. Fixed expenses are those that are impossible or extremely difficult to reduce. Examples of these are rent, loan payments, essential medicine for chronic ailments, and tuition fees. Variable expenses can easily be reduced or even eliminated. Some of these are entertainment, eating out and clothing.
Total all your sources of income. This is easy to do if you are on a fixed salary. However, if a large part of your income comes from commissions, or if you are an entrepreneur, you should be conservative and estimate a low-average monthly income.
Subtract your monthly cash expense from your monthly income for each month, for a period of 12 months. By doing this, you will see your projected cash balance every month. Note that I put cash expenses instead of simply expense. This is because at this point, your cash flow is more important; although in the long run, you must also take non-cash expenses into account since they reduce the value of your assets and in due time will need replacement or repair.
Eliminate or reduce expenses as needed to get a positive balance. First, work on the non-essentials or your variable expense group. Then if that won’t suffice, you have to reduce the less important expenses in your variable group. In fact, if you think more of it, even some of the fixed expenses can be postponed, reduced or even eliminated. You could move into a lower rent apartment or you could ask your doctor if there is available reliable generic medicine that is much cheaper.
While working on your budget here are some key points to keep in mind:
Factor in the effects of inflation. This is what the large majority of long-term plans fail to anticipate. The costs of living, along with most items, are likely to be much higher many years in the future.
Set aside first what you plan to save before allocating the remainder. If you spend and then save what is left, there may be nothing left to save.
Do not put all your eggs in one basket. No matter how fast the return on investment is or how established the institution is, never put so much of your savings in one place. There will always be risks, and if you cannot afford to lose that amount, split your cash into different investments.
Buy sufficient life and non-life insurance, plus a health plan. This article may be one of the few places you will read about buying these without any profit motive so hopefully you will find it more credible. You can make the most brilliant budget, but disaster can strike anytime, and it would be painful if your loved ones are left helpless.
Check out online budgeting sites. I myself have not tried using online budgeting tools but millions abroad find them useful. If you are so inclined, you can try them if they suit your needs. One of the more popular sites is Mint.com by Intuit, the makers of QuickBooks.
With the help of the tips above, plus other resources you can read, you can complete a realistic budget within a month. However, this is just the beginning as you must be able to comply with the budget. How to sustain your motivation and discipline to follow your budget is, in fact, the hard part. Next week, we will tackle this challenge.
*Originally published by the Manila Bulletin. C-4, Sunday, October 28, 2012. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.