What is the common problem shared by most budgets? It is a fact that they simply do not work.
This is because most budgets are formulated by well-meaning households on the fly. Rather than careful planning, people have a tendency to make up their budgets as they go along.
This is a shame, given how careful budgeting can pave the way for a more comfortable and prosperous financial future. More specifically, a well-planned budget can help you determine two important things:
- Are you spending more than you earn?
Without exception, outgoings that exceed income equal a recipe for disaster. Not to mention a mounting debt spiral that could prove catastrophic. If you are spending even slightly above your means, you need to make the necessary adjustments as soon as possible. This is the single most important reason to plan your budget carefully.
- How much can I afford to spend?
This is basically where you conduct all the calculations needed to work out your spending power. If you are making things up as you go along, this means you are running the risk of spending more than you can afford to. Meanwhile, working out exactly how much disposable income you have paves the way for financial stability. You know exactly how much you have to spend, so you can make sure you don’t spend too much.
Essential tips for household budgeting
All budgets are different, but they are nonetheless built around the same six considerations.
Each of the following will help you produce a workable budget for your household and avoid falling into debt:
- Collect all receipts and record all expenses
Keeping track of even a single week’s expenses mentally is practically impossible. Over the course of the average month, there will be dozens of minor (and not-so-minor) outgoings you completely forget about. Hence, the only way to be sure about what you are spending is to keep a full and formal record of every expense. Keep track of every receipt you’re handed and log your expenses in a journal or spreadsheet.
- Establish your objectives for your budget
Budgeting is only effective and satisfying when you have a specific goal in mind. Are you looking to put away more cash for a rainy day? Maybe save up for a well-deserved holiday. Or do you simply need to establish a financial safety net in case things take a turn for the worse? You need goals and objectives to work towards in order to make things happen.
- Avoid the temptation to guess or to round things up
Accuracy is the key to an effective budget. This means being as accurate as you can with your records and your calculations, avoiding the temptation to guess or to round things up. Over the course of time, minor discrepancies in accuracy can add up to a big difference on your long-term balance sheets.
- Divide your outgoings into ‘wants’ and ‘needs’
After recording your outgoings for a month or two, take the time to separate all expenses into two sections. One of these sections should be necessary expenses: rent bills, mortgage payments, utilities, groceries, and fuel bills, all mandatory and unavoidable. The other should be optional expenses, eating out, personal indulgences, entertainment, and anything else you don’t strictly need. It’s from this column that things can be adjusted as necessary in order to save money.
- Consider repaying smaller debts
If possible, it is worth considering repaying some (or all) of your smaller debts. With credit card balances, personal loans, and overdrafts, the interest payable on facilities like these can quickly stack up. The more debts you repay, the more interest you convert into extra cash in your pocket at the end of the month.
- Calculate your disposable income
Calculating your disposable income is as simple as tallying all of your monthly outgoings and subtracting this figure from your monthly income. The figure you are left with is your disposable income, minus things like pension contributions, savings, and so on. Once you have an exact end-of-month figure to work with, it becomes much easier to make safer and savvier spending decisions.