Budgeting made Simple

For most people, the idea of budgeting is the same as the idea of voluntarily putting yourself into a financial straight jacket. Budgets completely restrict your spending and they keep you from having fun…or do they?

In this business, we get a chance to work intimately with people’s finances every day. What I have noticed is that there seems to be two types of people: those who can budget/save, and those who can’t. The majority of people can’t. Why can’t they do it? Sometimes it’s lack of discipline. Sometimes it’s forced circumstances. Sometimes it’s laziness. Mostly though, it’s from bad money habits which have been developed through having no system in place to teach you good habits.

Everybody I’ve met in Australia can read. Why? Because there’s a system (school) in place which teaches everybody how to do it, whether they want to or not! But I haven’t yet met a person who was taught in school how to budget and how to manage personal finances. Which is why the majority of people can’t do it. The people who do budget well either learned it from their parents (who gave them a system), self-educated themselves, or are naturally good savers, which is uncommon.

I got interested in this subject at a young age and read different books which described different methods of handling finances. I tried many different systems of financial control. Interestingly enough, what I found was that most systems work, but you do have to use them!

The basic elements in a budget are simple:

Income – Expenses = Surplus

Did you notice that the word ‘savings’ does not appear in that equation? Most people believe that their ‘savings’ come out of the surplus. Believe it or not, they don’t. The savings have to be built into your ‘expenses’. The same way that you pay your gas, or electricity bill, you pay your ‘savings’ bill. It’s an expense that gets paid with the same priority as the rent, the mortgage, or the petrol in your car. It isn’t optional.

If you take a look at your income and expenses, you’ll find that the majority of your income is already being spent before you’ve even got it in your account. You’ve already committed money to the mortgage, car expenses, food, bills, etc. There’s not really much to have to think about in terms of where to spend your money. It’s already spent. Putting a system in place to make sure everything gets paid without any stress is what a budget is all about. Once that system is in place, then you can look and see what you can do with your surplus, which can become your ‘fun’ money…at least until some financial advisor comes along and tells you how you should be spending your ‘fun’ money ☺

If you’ve got questions on budgeting or you want a tool to help separate out your different categories of expenditure, let me know at damian.espinosa@investorsdirect.com.au. As you can imagine, budgeting is one of the areas that we talk to people about the most.

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