The Effective Budget

Budgeting is telling your money where to go, rather than wondering where it went.  – John C. Maxwell

Creating a spending plan, or simply put, a budget, was my saving grace financially. Before, when I never used to have one, I had no substantial savings at all, apart from the £2,000 I had saved up in a pension pot in the course of five years since I started working! When I came to the realisation that I could do better since I was in my twenties and having a decent income, I decided to self-educate on personal finance by reading published material, and watching a lot of personal finance videos online.

The knowledge I gathered then, was enough to boot me to have a complete financial makeover, and within 24 months of effectively tracking my finances and applying austerity measures, I had saved up to £40,000. I began to share some of this knowledge with my family because I also wanted the best for them. What astounds me is the simplicity of it all, and yet many do not apply this simple knowledge. Personal finance is usually not on the school curriculum, and having a thousand degrees in finance does not equate to having financial prudence or economic success. I can guarantee you that many of the so-called finance professors are knee deep in debt, and many do not even have a simple budget to keep their finances in check, and yet they teach on the subject! Some of the principles on budgeting I am going to share are quite common sense, but as they say, common sense is not that common to all.

Make it a Habit

So many people shun the idea of budgeting, and dismiss it as something that does not work. Of course, if you lack discipline, this will not work for you; however there are ways round the issue, like automating your savings and expenditure as soon as you get paid, to avoid late payment fees, and missed payments into your savings pot. Once you make this into a habit, everything else will eventually fall into place and it will be easier for you manage even larger sums of money. Something magical that happens once you master how to manage what you have right now; somehow, the universe opens doors for you to receive even more money to manage because you have become a prudent steward, capable and responsible. One thing for sure is that you might struggle to keep up with the budget for the first few months, but once you get into the swing of things, with some adjustments, you will conquer the formidable budget. No one is perfect, but if you know yourself well, you can put measures in place to trick yourself into doing the right thing. Having a monthly financial plan helps you put everything into perspective and have some control over your finances. It is a wonderful feeling to have control over your finances, rather than your negative financial situation controlling and dictating your life.

Make it Simple

Drafting a budget need not be complicated, and monthly updates should not even take more than 30 minutes of your time. One of the reasons why people give up on the idea sometimes is because they try to make it complicated when it does not need to be. Make it as simple as possible and personal to you. What matters about a budget is that the author understands it, even if it does not make sense to the next person. Each person is different, and sees things differently. You can create a simple budget using spreadsheet software such as excel, it does not have to cost you anything to have or make one.

Pay Yourself First

This should be the first line of your budget plan: Savings and Investments. Life would have us pay others first before we get a piece of the pie, and everything out there is screaming for our hard-earned money. Yet it is the financially prudent that know the value of paying themselves first before they pay others. As per the 50/20/30 rule, 20% on savings and investments is a starting point, and increasing that percentage regularly is totally acceptable – after all, these rules are meant to be broken and adjusted according to personal needs. Most of the times people tend to save what they have left after spending, instead of spending what they have after saving first. In your budget, always make sure that savings and investments are a top priority because this is when you get to keep what you have worked hard for, and park it in interest earning platforms in order for compounding interest to do its magic. Having a savings and investment plan is crucial, as this will save your financial future. If you want to take things a step further, you can have a separate savings and investment budget whereby your savings are allocated into categories that fit your goals and dreams, i.e. vacation, retirement, new car, house e.tc.

Close all Loopholes

A budget will shed light on where you are overspending and needing a cutback. It is the perfect way of tracking your income and expenditure items, so that you can eliminate what you can do without. Watch out for things like subscription fees for services you no longer use, small purchases which you think are insignificant and yet in the long run they add up to a significant sum. Just imagine spending £2 everyday on coffee, that £2 multiplied by 365 will add up to £730 per year on coffee, which you could prepare from home. These small purchases may not seem much at first, but accumulate to a large sum at the end. If you are ok spending that much on coffee, and if it makes you happy, fair enough, then go for it if you have the money to splash, but for someone trying to build up a substantial savings fund, then cut back on that spend.

Another loophole to watch out for is what they call lifestyle inflation. Ever noticed how some people’s spending increases with every pay rise? If you are serious about saving money, then watch out for this trick. Always aim to live well below your means, and save money consistently and in keeping with your goals and vision. Allocating percentages to your expenditure and savings plan will help keep lifestyle inflation under control. You could start with the 50/20/30 rule whereby 50% of you income is spent on life essentials, 20% on savings and investments, and 30% on personal lifestyle expenses. Including percentages in your finance management plan will ensure that amount saved and spent is always consistent with percentages set, even when your income increases.

Fun Money

Putting austerity measures on your finances does not have to feel like a punishment. When all you do is deprive yourself and hoard cash as if it was a scarce commodity, and do not leave room for fun, you are bound to crack under pressure one day, and go on an uncontrolled spending spree because you have been depriving yourself too much. Be wary of this trap! Whilst it is good to save money, it is equally important to spend it responsibly. In your budget, always make room for that fun money so that budgeting does not feel like a burden, but a blessing. The whole reason why we budget is so that each penny has an appropriate allocation either for spending or for saving. Budgeting is never about depriving yourself to the point of exasperation, but it is more to do with liberating your purse to the freedoms of responsible spending, it is all about taking the reins on your finances. Definitely put heavy austerity on the things you can do without, and have a bit of freedom to spend on things that really matter to you like creating experiences with friends and family. Money spent responsibly on what matters the most, is money well spent.

Conclusion

When it comes to budgeting, always have a vision of the kind of life you desire, that helps keep everything in perspective. I find that having a long-term plan to follow through will help keep me disciplined when it comes to spending my money. Knowing what I want to achieve in future, and the kind of life I want to live is enough drive to help me stay focused and disciplined. After having spent so much time working, I sure want to have a substantial amount of money to show for it than have nothing at all!

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