A budget is the best planning and financial control tool for every home.
Unfortunately, most people find budgets scary and intimidating. This is not surprising, given that budgeting is the quickest route to a financial reality check.
The rising cost of living has made balancing income with expenditure a nightmare for many homes. Without proper planning, expenditure can easily creep past income to the detriment of your financial health.
The good news is that keeping an effective household budget is simpler than you think. It allows you to meet your living expenses and keep debts at manageable levels. Furthermore, it helps you avoid the frustration and guilt that comes with mismanaging finances.
Before you get started
It is important to stop procrastinating and start budgeting as soon as possible. However, knowing what to include or exclude in a budget can be a challenge for most people. These three factors should be considered beforehand:
- Timing: Money should be set aside for bills in the order of their due date. This is to ensure you pay all bills promptly.
- Needs versus wants: This is a great way of identifying what you need rather than what you desire. Needs take precedence over desires.
- Importance: The trick to avoiding budget deficits is to eliminate unnecessary expenses. These include subscriptions for magazines that you never read, or a pay TV package you hardly watch.
Preparing a home budget in 5 steps
There are a few ways of preparing a home budget. The traditional pen and paper is usually adequate, although a computer spreadsheet or other budgeting software is preferable. A spreadsheet makes it easy to regularly adjust the budget to reflect changing circumstances.
Here is how to get ahead of financial pitfalls by following 5 practical budgeting steps:
1. List all expenses
All expenses incurred in a calendar year should be listed in two main categories. These are fixed expenses and variable expenses. Fixed expenses are those that do not vary from month to month such as:
- Rent or mortgage
- Loan repayments
Variable expenses change on a monthly basis and include:
- Food and grocery bill
- Utility bills (power, gas, phone, internet)
- Entertainment expenses
- Healthcare costs
- Transportation costs
- Home related services such as pay tv, lawn mowing, ironing lady etc.
Use the previous year’s figures to make annual estimates. Divide this by 12 to get a flat estimate for every month and then adjust monthly as the actual figures come in.
2. List all income
A list of all sources of income should then be prepared. These will include:
- Wages and Salaries
- Government Assistance
- Bank Interest
- Asset sales
3. Calculate Net Income
The home budget should have two columns, one for expenses and another for income. A third column should then be added to show the difference between income and expenses. You may use formulae in the spreadsheet for easier calculation and accuracy.
The difference between the two will be your net income or loss. A net loss will indicate an overestimation of expenses, which will need to be adjusted to match your income. A surplus will allow you to add a savings and investment provision to your home budget. This will help you put aside money for the future and for emergencies as well.
4. Make a cash flow budget
Once you have made your home budget, a separate cash flow budget should be drawn up. A cash flow budget lists all cash expenses and cash income. This budget is important for managing your cash flow to ensure that you do not run out of money during the month. By knowing which expenses are to be paid for in cash, you can work out how much money you will need to have on a monthly or weekly basis.
5. Allocate budget surpluses
Ideally, your expenditure should be less than your income, leaving a surplus for savings and investment. By using credit cards and loan facilities wisely, you should be able to avoid runaway debt scenarios. Surpluses in your budget can be used to reduce household debt such as mortgages, or paid into your savings and retirement accounts.
5 Essential Home Budgeting Tips
Preparing a budget is the first step in what is usually a tough road to proper financial management. Sticking to a great budget is easier said than done. However, it can be made easier by following these essential tips:
1. Be Honest
A budget is effective only when the information in it is authentic. When preparing a budget, be practical about your expenditure and that of the entire family. Do not downplay debts and other financial difficulties, but accept bad spending habits and try to correct them. Compare your budget with past bills and spending trends to assess its accuracy.
It makes good sense to differentiate between necessary expenditure and non-essential spending. If your finances are strained, cut back on some fun activities such as movies and dining out, which can be quite costly. Channel your money to critical spending such as the mortgage, loans, education and transport.
3. Pay down debt
Debts can wreak havoc on your finances if not well managed. Interest payments and penalties are especially costly if you do not pay your debts on time. Avoid borrowing unless when absolutely necessary. Most especially, avoid costly borrowing through means such as high interest credit cards or bank overdrafts. Additionally, try to pay more than the minimum required on your loans to get yourself out of debt faster.
4. Track your progress
Keeping an eye on everything you spend is the best way to know if you are sticking to your budget or not. Check your budget on a weekly basis to see if you are on track, and adjust your expenditure accordingly.
5. Don’t be too hard on yourself
A home budget should not torture you and your family into financial freedom. Keeping too tight a lid on expenses can make it difficult to stick to a budget. Ensure you set money aside for holidays, emergencies, birthdays, social events and other family activities. This will make budgeting both useful and fun for the entire family.
Home budgeting is an essential exercise regardless of your income level. No matter how much you earn, failure to document your expenditure and income can quickly send you into financial difficulties.
Get started with your home budget today and your wallet will thank you for it!
Featured image via moneycrashers.com