Most People Don’t Really Manage Their Money.
After more years in Banking and Finance than I care to admit, I can remember very few people who took responsibility for, and properly managed, their personal finances. In my bitter experience, most people lived from one month to another without knowing where their money was going, or what they could really afford, or what was totally outside their budget.
If it comes to that, very few people have a proper, written, up to date, personal and household budget. If you can put your hand up and say that you do, and that it is actually written down, (or on a spreadsheet, or otherwise on your computer), then you can skip the rest of this post and award yourself a gold star.
The point of having a budget is that it stops you being caught out by unpleasant financial surprises. A budget also lets you plan ahead, for the rest of this year, next year, for the next two or three years, for a wedding, your kid’s college, for your retirement…
These are the steps you need to follow if you are going to create or revise your budget.
- Make a list of all the money you owe. Before you save anything, before you make any investments, you should work towards paying off any and all loans and credit cards balances you have. And, you can’t plan to pay off your loans early if you don’t have a proper budget.
- Make a list of all the regular payments you have to make. These will range from your mortgage, property taxes, utilities bills, right through to charitable donations, cable TV, and gym membership…
- Make a list of your usual necessary expenses that you pay as you go along. How much petrol do you put in your car each month? How much do you spend on groceries, clothes, shoes…
- Make a list of how much your usual discretionary purchases are costing you. These are things you don’t actually need. How much do you spend at your local bar or any bars. How much does eating out cost you each month? What do you pay for cigarettes / vaping supplies each month. How much do you waste on gambling and booze.
- Write down anything else that you buy on a regular basis, and how much it costs you. Add in an amount for contingencies; all that stuff you can’t remember buying, and those weird impulse purchases.
- Put all these lists of the money you spend into order of importance.
- Turn all these lists into a monthly budget, which might look something like this;
Obviously your numbers will be totally different, and you may have some different categories, for example; health insurance, pet care insurance, cigarettes, booze, sports club membership…. (And as it goes, the example I’ve shown is poorly ordered, for example Transportation should be above toiletries and grooming.)
This kind of budget lets you begin to do some real financial planning.
Look at your budget, the most vital things should be at the top, and the things you could really get by without should be at the bottom. It should fit with Maslow’s Hierarchy of Needs. (albeit turned on its head)
If your monthly total is less than you earn, all well and good. Don’t save or invest your spare cash, use it to pay off some of the money you owe, like your mortgage. Saving or investing while you owe money elsewhere is stupid money management.
If your monthly total is more than you earn, you’re in trouble. You need to cut your spending, and you start by cutting at the bottom of your budget, not at the top. Spend less money in bars, buying cigarettes, eating out, gambling, buying booze, being the member of a gym…
Annual income twenty pounds, annual expenditure nineteen pounds, nineteen shillings and sixpence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds and six pence, result misery. ~ Mr Mcawber, by Charles Dickens
Don’t even think about saving, investing, buying a new car, or building your pension fund, if you don’t have a proper realistic and honest written budget, one that you can stick to. You know it’s good advice, the kind of advice George Bailey would give you.
these opinions are mine and mine alone