Everyone wants to get ahead financially but many find that managing personal finances can be a challenge. If you’re saving for a home deposit, want to pay down your debt faster or go on an amazing holiday, or simply want to break free of living from pay cheque to pay cheque, it can be hard to keep your finances in check.
What if there was a way for you to properly manage your entire spending, and still save enough for your future goals? Well, there is one, and it is called budgeting.
For many people, the thought of completing a budget is overwhelming. Creating a record of all your expenses is in not an exciting idea and is possibly the most tedious task you will complete this week. But, with discipline and determination you can make your money work harder and significantly improve your financial position, by creating a personal budget you can stick to.
Budgeting is simply a process where you create a spending plan by reviewing all your expenses, assets and income. The spending plan you come up with can, and most likely will, change through the coming months and years, in response to changes you make in your lifestyle and spending habits. You may be wondering what the benefit will be, or why it is important to budget? The simple answer is that a good, easy to follow budget is key to your financial success and may save you from significant trouble.
Throughout the month, there are a multitude of different expenses you must account for. These expenses, coupled with daily spending, can often make us lose sight of how much we are spending on an average day. Sticking to a budget will ensure you do not spend more than intended and help you to save enough money for things that you truly need. Budgeting is nothing new and has been around in many forms for many years. Some of you might remember your grandparents putting small amounts of their pay in jam jars each week to cover major bills such as electricity, water or rates. Now there are modern budgeting apps or artificial intelligence products that are available to track and categorise your spending.
How to avoid the mistakes other people make
Creating a budget is surprisingly simple, but lots of people don’t bother because they don’t realise how easy it is to create and commit to. So, to help you make better budgeting decisions, here are some of the most common budgeting mistakes you should avoid at all costs:
1. Not Tracking Your Spending
A budget should include all your expenses and income. From the spare change that you find in the couch cushions to the snacks that you buy when traveling, you must include everything. If you don’t mention the small things in your budget, it may
cause a serious problem down the line. Just because you like a beer on Saturday afternoon it doesn’t mean a budget says you can’t have it, but if it is not in your budget you may not have the spare cash to pay for things you really want or need.
2. Not having discipline
If you want to achieve your goals, sometimes you have to make a sacrifice. A big mistake people make when making their budget is that they mistake wants for needs. An example of this is food – buying food is a necessity yet eating out is a want. Although there is nothing inherently wrong with you indulging in your desires, you need to ensure that these are included in your budget.
3. Wrong Assumptions
When making a budget, people often consider certain expenses as stagnant and think that they will not change. While expenses such as mortgages and rent stay constant for longer periods, telephone bills and electricity bills can vary from month to month depending usage. You also need to remember to include the once a year expenses like birthday presents or a valentine’s day splurge.
4. No Emergency Fund
A budget is only as good as how well you actually stick to it. Just like exercise, when there are challenges and you skip a session the next one is harder. The budget equivalent of skipping a workout is having an unexpected expense crop up. A mistake that almost everyone makes when budgeting is not establishing an emergency fund. It is essential that you keep money aside to cater for the unexpected expenses, so they are just part of your workout and you can keep exercising the next day.
5. Not paying yourself
A budget that doesn’t reward you for working hard will quickly feel too restrictive. Whether you are rewarding yourself with little extras or rewarding yourself with a clear plan to meet your financial goals, if you don’t have some regular assurance that you are achieving the things you want, you are not likely to stick to it.
How to Make a Budget Work
One of the best ways to ensure your budget works involves
• Prioritising all your goals and
• Committing to the changes that you will have to make.
The main objective of a manageable budget is that you will be able to achieve your identified financial goals. However, accepting that you cannot accomplish all your goals at once is important as it can be tough to save for all your financial goals along with handling your expenses. It is key that you set realistic goals that are achievable with your job and income. In
some cases, this may mean adjusting some of your goals if you cannot reach them under your current circumstances. And remember there may be hiccups along the way, so be flexible and make those adjustments.
Commitment and following the budget is possibly the most critical part. You must have the will to change your lifestyle for the budget to work. Understand that it will be hard at first, but well worth the effort. Not spending lavishly and saving up your money almost always pays off, especially in the long run. You must always keep your goals in mind and remind yourself why you are struggling to meet these goals. Checking your progress frequently helps keep you motivated, seeing that you are closer to achieving your goals, and you may even spot something else you can do to achieve them sooner.
Financial success does not happen without a plan and a budget is nothing more than a clear plan to help you achieve your goals. Most of us think the key to greater wealth is to earn more. But this is only one side of the equation, because if you earn more but spend more at the same time, then you are probably no closer to achieving your goals.
To put it simply, a well-made budget can prove extremely useful in the long run, so start saving now.
By Matt Jacobson
Senior Financial Adviser