Money management skills – How to budget money

If you want to ensure you live within your means and stay out of financial trouble you are going to have to learn how to budget money. Budgeting is a useful exercise that will make you stop and think about your money, which allows you to identify exactly where each and every penny comes from and where each and every penny goes. It is amazing how quickly we can lose track of our money and how wasteful we can be. Many people argue they spend the absolute minimum and can’t make any more savings, however if they really analysed their expenditure they would find a few areas where savings can be made.

How to budget money – Identify your income

The first stage in the budgeting process involves identifying your income. For the majority of people this will simply consist of monthly salary or wages, however if you receive bank interest, dividends, online earnings and other receipts you also need to take these in to account for your budget.

How to budget money – Identify your expenses

The next stage in the budgeting process involves identifying your expenses. Naturally there will be the standard expenses, such as rent or mortgage payments, utility bills, broadband and internet, grocery bills, lunches, social events etc. etc. However, there will also be smaller items of expenditure, such as the odd chocolate bar, magazine or newspaper. These items may seem insignificant on their own but if you add the cost up over a week or month these costs can soon escalate and end up representing a significant chunk of money.

When you identify your expenses you have to make sure that each and every item of expenditure is noted down and that nothing is missed. One of the best ways of making sure you capture each and every item of expenditure is to maintain an expenses diary to record every purchase you make during a month. You need to carry this diary on you at all times and note down each and every single purchase you make, however small it is. So, every parking ticket you buy, every can of soda you buy, every bit of loose change you put in the charity box and so on needs to be recorded.

The first time I ever maintained an expenses diary I was horrified about the cash I squandered away on small and insignificant items I could easily have done without. If you have never maintained an expenses diary before be prepared for a shock, as you will be surprised just how much cash you waste.

How to budget money – Drafting the budget

Many people think drafting a budget is difficult however this is not the case. By the time you reach this stage in the budgeting process you have completed most of the hard work and the next stage is little more than a listing exercise.

As you can see from the table, you need to divide the page up and then list all sources of income and expenditure. Total the income, total the expenditure before deducting the expenditure from the income. If there is a deficit you are going to need to analyse your expenses and make the appropriate cuts to eliminate the surplus. If you are lucky enough to have a surplus you can increase your “entertaining” budget or simply build up a cushion of cash to help in emergency situations or to spend on a family treat.

You can prepare a budget on a piece of paper although it is much easier to prepare the budget electronically on Excel or some other similar package. Using the auto sum and formula functions of electronic packages will help you make sure your budget is accurate and adds up.

How to budget money – Monitoring and updating the budget

Once you have drafted your budget don’t just leave it left on your hard drive doing nothing, or in a filing cabinet gathering dust, if your budget is prepared on a piece of paper that is. A budget is a moving feast that should be closely monitored, revised and amended and then monitored again as necessary.

A budget should be an accurate representation of your cash in and cash out and you should track the actual results against the budget to see how you are doing. If you aren’t spending as much money as budgeted for on some items, reduce the budget accordingly. If you are spending more money than budgeted for on some items, increase the budget accordingly and see what happens. Similarly, if your income increases, or decrease, adjust the budget as necessary. If your budget is way out, it doesn’t matter too much providing you revise your budget.

How to budget money – Taking remedial action

If your actual spending habits exceeds your income you will end up in financial difficulty at some point. Even if you have cash savings, if you are spending more than you receive the cash will run out eventually. If, when monitoring and updating your budget, you find you are experiencing a cash deficit you need to take action, and quickly.

Basically, you have two options. You can either increase your income or reduce your expenditure. Increasing income means doing overtime or taking on a second job, both of which are going to be out of your control. Reducing your expenditure, on the other hand, is within your control and something you can easily change.
No matter what you think, how much you think you have cut back there are always areas where you can reduce your costs. Eliminate unnecessary expenditure, buy supermarket own brand foods as opposed to premium branded products, use coupons to get cash off, shop in cheaper department stores, take your own lunch to work instead of eating in the canteen, participate in car sharing schemes to reduce travelling costs. There are plenty of things you can do to reduce your expenditure.

Once you have identified the problem, and this is done through the budgeting process, the important thing is to take action as soon as possible. Never stick your head in the sand and pretend it will go away, because it won’t and prolonging the situation is only going to make things worse.

How to budget money – The final word

As you can see it is very important you know how to budget money. Preparing a budget will not only make you sit back and analyse your income and expenses but it will also help identify times when you are likely to run in to a cash deficit, which means you can take remedial action to protect yourself by making cuts and tightening your belt. Budgeting is an important activity and one we should all do to ensure we live within our means and stay out of financial difficulties.