Do we need a personal budget?
Mention the word BUDGET (especially personal budgets) and you will hear groans and moans. Most people will roll their eyes when this word is mentioned because it means that we will have to put in some dicipline and be mindful of our finances.
Most people I know (me included) would usually amble along the days in the month till the next paycheck comes along. Some would exclaimed in disbelief when the bank balance falls into a 3 digit number and would wonder out loud where the money has gone. So, how do we fix this? Well, I think having a personal budget would be one way.
Personal budget, according to Wikipedia is a finance plan that allocates future personal income towards expenses, savings and debt repayment. Usually, in setting up a personal budget, previous spending and earning patterns are examined so that the personal budget set-up is realistic.
There are many ways to set up a personal budget but the key consideration is whether we will be diligent enough to follow through the process as well as to stick to the plan. It can be as easy as getting a piece of paper (or the back of an envelope) and a pencil and start putting down a list of expenses in a month (mortgages, car installments, groceries, utilities, education, entertainment etc.) and a list of incomes sources (salary, commissions, dividends, rental etc.). There are even softwares out there which will help us keep track and even project the future spends.
Apart from the method and categories, we should also have some goals in mind when we set this up. My personal goal is to have my investment portion grow by 10% over the next 12 months. This would mean that I have to cut down on my expenses, or to increase my income. Cutting down expenses is my main focus since it is the fastest way to achieve my personal goal.
For each category of spend, we should also have an allocation fixed. This is so that we do not overspend in a specific category and then find ourselves short of funds for other things. E.g. 10% allocated to utilities, 20% to savings, 30% to mortgages and car loans etc. This way we will be able to tell the breakdown of our spend and thus makes us feel more in control of things.
And I think we will agree that when we feel more in control of things, especially where finances are concerned, we will have the motivation to stick to a plan. In this case, the budget set. We do not have to track our expenses very long for us to identify a pattern. After a month or so, we should be able to identify areas which are deemed to be a neccesity or nice-to-have.
Neccesities include food, mortgages, basic utilities and clothing. This category can also be exanded to include savings, insurance and investments, depending on how you look at it. Nice-to-have includes designer bags, watches, jewellery, fine dining, luxury holidays etc.
For each spend that we have, one of the main question asked should be “Do I really need this?” It applies to both neccesities and nice-to-haves. E.g. do I really need to eat organic or are normal vegetables good enough? Being honest here is important if we are really serious in making this budget work.
Finally, we have to bear in mind that a personal budget is not meant to stifle our life. It merely acts as a guide to our goals. Apart from setting realistic goals, we should also be flexible in our budget as our income and expenses changes.
