PERSONAL BUDGETING

 

 

 

(Acknowledgement-   a number of the ideas for this discussion were extracted from "Making Money Made Simple"  by Noel Whittaker &  Roger Moses)

 

Becoming well off financially is not a matter of earning more money but of using the money you have in a better way. The only way to make the best use of your income is to draw up a money plan. The correct term for it is a budget.

All successful businesses draw up budgets in advance to forecast future business, cashflow and purchase requirements, and then endeavour to maintain the guidelines set by their budgets. The rationale of drawing up personal budgets is no different, albeit it on a smaller scale.

Drawing up a budget sounds pretty frightening but is really very simple. You donít need any special qualifications to do it. It is just a list with your expected income listed in one part and your expected spending and savings on the other.

Cash budgeting is usually carried out on a monthly basis (sometimes divided into smaller periods) and covers a period from three six or twelve months in advance. It is usually difficult to make accurate estimates beyond this.

STARTING ON YOUR BUDGET

Before you prepare a budget you need some basic information about the way you are earning and spending to date and find where your money is going now.

What do you earn?

Prepare an analysis of what you earn currently. Write down the amount of your "take home pay" and then convert it to a yearly amount by multiplying it by 52, 26 or 12 depending whether you are paid weekly, fortnightly or monthly. This figure is your net yearly income and will indicate all you have to live on for the year. The following table is an example of this:

ANNUAL INCOME WORKSHEET

 

Income

Week

Fortnight

Monthly

Annual

First Net Income

$384.62

   

$20000.00

Second Net Income

       

Child/ Family Support

 

$104.00

 

$2704.00

Unemployment Benefits

       

Interest

       

Board/ Rent Received

       
 

$384.62

$104.00

 

$22704.00

Analysing your Spending?

Prepare a similar worksheet relating to your spending habits.

Split your spending into three categories, as follows:

** Essential Fixed Spending

These items occur regularly and the amount cannot be varied by you e.g. rent, loan repayments, school fees, insurance, rates, car registrations, telephone rental

** Essential Variable Spending

It would be hard to do without these, but you can vary how much you spend by changing the pattern of your lifestyle e.g. petrol consumption, telephone calls, shopping habits, power usage

** Discretionary Spending

These are things that you like to have but could cut down or even cut out if things get very tough e.g. clothes, cigarettes, outings, holidays, magazines and gifts.

The following worksheet is an example of this:

 

ANNUAL SPENDING WORKSHEET

 

Cost

Week

Fortnight

Monthly

Annual

ESSENTIAL FIXED EXPENSES

       

Rates

       

Rent/ Home Mortgage payments

       

Insurance- Home

       

Insurance- Motor Vehicles

       

Other Loan repayments

       

Hire Purchase Repayments

       

School Fees

       

Registration- Motor Vehicles

       

TOTAL ESSENTIAL FIXED EXPENSES

       
         

ESSENTIAL VARIABLE EXPENSES

       

Fares/ Parking

       

Petrol

       

Meat

       

Groceries

       

Fruit and Vegetables

       

Gas/ Electricity

       

Repairs to Home and Appliances

       

Repairs to Car

       

Telephone

       

Chemist

       

Dentist

       

Savings

       

School Books/ Uniform

       

Superannuation

       

TOTAL ESSENTIAL VARIABLE EXPENSES

       

DISCRETIONARY EXPENSES

       

Miscellaneous (replacement of appliances etc)

       

Clothes

       

Christmas/ Birthdays

       

Hairdresser

       

Alcohol

       

Cigarettes

       

Insurance

       

Medical Insurance

       

Entertainment

       

Holidays

       

Newsagent

       

Pets

       

Sports/ Hobbies

       

Church

       

Babysitting

       

TOTAL DISCRETIONARY EXPENSES

       
         
         

TOTAL ALL EXPENSES

       

 

The Cash Surplus or Deficit

Subtract the total of your Annual Spending Worksheet from the total of your Annual Income Worksheet. The difference is a surplus (income higher than expenses) or deficit (income lower than expenses.

WHERE TO MAKE CHANGES

Essential Fixed Spending

These items cannot be reduced without major adjustments to your way of life. You could reduce mortgage payments or rent by moving and eliminate telephone rent by having the phone cut. But, generally, these items donít change much.

Essential Variable Spending

These are the areas where large savings can be made. Without a budget everybody tends to overspend in the variable areas. Then there is nothing left over for the fixed expenses and nothing at all for savings. The correct way is to take fixed expenses out of your income first and then variable expenses last of all. If you donít, you will continue living beyond your means and continue experiencing the pain which that brings.

WAYS OF CUTTING SPENDING

Telephone Calls

** Put a money box next to the phone and ensure that every time a toll call is made a $2 coin goes into the box.

Food

** The top selling items in supermarkets are soft drinks, bread and cakes, lollies and chocolate, pet food and cigarettes. Most of these items could be eliminated or severely cut down, and both our health and bank balance would be much better off. Most families could save $20 per week in this area.

** Most shopping overspending is caused by a simple lack of planning. Those last minute rushes to the corner store where things cost much more could be avoided by planning the weekís meals in advance and shopping to suit. By doing this you can take advantage of the specials and if you have some savings available you can buy in bulk.

** What about growing your own fruit and vegetables rather than growing them?

Hire Purchase Purchases

** Do you really need to purchase that item? Hire Purchase items attract a high interest rate and you will pay back a lot more than the original purchase plus the monthly repayments will make it more difficult for yourself to meet other cost commitments. Can you wait until you have the money available and pay for the item in cash?

Child Minding

** Can be costly. Look at sharing with your neighbours, and/ or pooling so that they can look after your children one day and you look after theirs the next.

Clothes

** After the motor car clothes are probably one of the biggest areas of waste for the average person. Many people make their own clothes and many more are happy to buy "as new" second hand clothes from shops that sell them. Big savings can be made by doing this.

Buying Second Hand

** Huge savings can be made by buying near new articles through newspaper advertisements.

Petrol

** Sharing with others the travel to work or other places will reduce costs.

Cigarettes

** If you canít give up smoking cut it back.

Entertainment

** Reduce the alcohol intake.

** Go into the country or the Botanical Gardens etc for a picnic, instead of dining out.

Gifts and Christmas

** Open a special purpose account at your bank and put a fixed amount away every week. Everybody overspends at Christmas but if you put something away every week it will be there when you need it. This will avoid you getting into debt at Christmas.

Hobbies

** Perhaps your hobbies can work for you. Maybe you can make things and sell them. There is a great chance to make extra income.

 

DISCIPLINE

Putting your life on a footing where you are in control, making intelligent choices, and being free of all aches in the pocket when the bills mount up takes discipline and you will probably have to make tough decisions in some spending areas. This may not be pleasant, but if you donít do it you will be facing far more unpleasant medicine when the weight of mounting debt starts to grow on you.

 

PAYING OFF PERSONAL DEBT

Start by listing all your long term debts

e.g

*Housing Loan $60,000 @ 11% repayable at $571 a month 30 years to go

 

*Credit Cards % $3000 @ 18% repayable at $150 a month

 

*Personal Loan for Car $8000 @ 14% repayable at $160 a month 6 years to go

 

*Loan on Investment House $75000 @ 12% repayable at $1320 a month 7 years to go

The total repayments are $2201 a month but only the interest on the investment loan is tax deductible. This means that it is the cheapest real rate of cost to you.

In this situation you should pay extra payments to and endeavour to pay off the loans in this order:

** Credit Card

** Personal Loan for Car

** Housing Loan

** Loan on Investment House

 

THE COMPOUND INTEREST CONCEPT

The compound interest concept illustrates what amounts put aside can grow to when interest is added, then further interest is added to the amount plus accrued interest.

If you were to make savings of $100 a month and put it aside in an investment the amount would grow to:

Period

At 6% Interest Rate

At 8% Interest Rate

1 year

$1233.56

$1244.99

2 years

$2543.20

$2593.32

5 years

$6977.20

$7347.60

10 years

$16387.93

$18294.60

20 years

$46204.09

$58902.04

 

 

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