How To Better Budget Your Income

With today’s global credit crunch, everyone is feeling the financial pinch. The ability to save even a little each month is becoming a struggle for many. It’s times like these when we all need to get serious about the money we spend and start budgeting.

It’s surprising how many people don’t know where their hard earned income goes. They know the big spends, such as a mortgage payment, but when it comes to the money in their pockets, some are left wondering “Where’s it all gone? I’m sure I haven’t spent that much!”

This post will introduce you to the art of household budgeting so that in the future, you’ll have better control of your money and you’ll know exactly where every hard earned penny has gone.

The Budget Statement

The first thing to understand is that running a family home is not unlike running a business. Both have incomes and expenses and it’s by understanding these amounts, by producing a monthly budget statement, that can help us get a better grip on our finances.

Every month we will incur costs and produce income. To begin with, we need to break both of these categories down. Income will normally consist of take-home pay (after tax), any bonuses we receive from work and interest on a savings account etc. Write all these incomes down on a sheet of paper, clearly indicating their sources. The amounts we receive on a yearly basis, such as the interest on savings and our company bonus, divide by twelve and add the total to the monthly statement.

Secondly we need to do the same with our expenses. As in business, household expenses can be sub-divided into fixed and variable costs. Fixed costs are the amounts paid each month and which cannot be missed. For example, mortgage payments, insurance premiums, the monthly groceries and loan payments are all fixed costs.

Variable costs are those things that can change each month. The amounts we spend on clothes, take-out meals, DIY, and magazine subscriptions are examples of variable costs.

Working out our fixed and variable costs can be more challenging than our income as usually most households only have one or two income streams. Nevertheless stick with it, take your time, and try and list every fixed and variable cost against your income.

Some people include personal allowances as a variable cost but I prefer to include them as a fixed amount. Everyone in the household should have a set amount which they can spend whenever and however they want. This then avoids the habit of dipping into the account every time we need some money. A problem with dipping is that often we can dip to deep and before long there’s nothing left to pay for the essentials.

Balancing The Books

Ideally, after completing this exercise our income will be greater than our expenses. Unfortunately however, we often find the opposite is true and that our expenses outweigh our income. Therefore we need to balance the books, or in other words, we need to make the expenses column on our list, at least equal to the income. The more we can chip away at the expenses, the lower they become and the greater our expendable income will be.

To achieve this we need to take a long hard look at our variable expenses. Remember, fixed costs need to be paid regardless. If they are not, there could be serious consequences. So we need to make up the difference from our variable expenses.

This can best be achieved by asking ourselves some lifestyle questions. For example, do we really need to eat out or have a take-out once a week? Can we survive on once a month? If so, work out the difference and knock down the variable cost. As another example, how many magazines do we currently subscribe to. Do we honestly read them all, cover to cover, or do we just read one or two and then glance at the others? If the latter, look at the difference in cost and make the adjustments. Do we really need to buy new designer wear every week? Can we instead buy shop branded clothes and only make one designer purchase a month? Again, make the adjustments to the expense column.

Asking such soul searching questions will help us balance the monthly statement, but sometimes trimming the variables is not enough. Sometimes we need to attack the fixed costs. Can we for instance switch energy providers or go on a cheaper tariff? Can we change to a cheaper cable or satellite TV subscription or even, lower the personal allowance we receive?

If after making all these adjustments we still find our expenses are too high, it would be wise to seek professional help from a financial adviser and perhaps consider a radical lifestyle makeover. Fortunately though, for many of us, drawing up a monthly budget statement should be enough to find that, with a little bit of trimming and tweaking, our income does indeed exceed our expenses and we will also have gained a better understanding of our household budget.

Do you have any great budgeting tips you’d like to share?

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