I struggled initially to write this post, I couldn't figure out a simple description which would get across to any reader what budgeting is, and I certainly couldn't find a way to get it to sound nice and cool, the best I had was: Budgeting, the foundation for all sound financial management.
Now that's true, true and mind-bendingly boring..it sounds like one of those ads they play during the evening news. So, my mission, is to explain budgeting to you guys, in a way that won't have you closing the tab after the first paragraph. Here we go. Budgeting, as I said before, drives every sensible decision you'll ever make with regards to money. Want to afford that new car in 3 years? Want to buy that new car right now and need to know if you'll be able to live for the next 3 years and comfortably make payments? Want to get every pair of shoes in every shoe store in whichever Florida mall you plan to visit soon? Budgeting is key to getting there. It is roadmap to financial success. everyone can and should budget, regardless of how much (or little) money you make.
WHAT IS A BUDGET?
A budget is a financial plan listing money coming into your pockets (or money you plan to bring into your pockets), and money being spent (or planned to spend). That's essentially it. It's simple sounding but, like many things, a lot harder when put into practice. The first step on your journey to financial freedom should be the writing of a budget. There is no step, more necessary than this.
HOW DO YOU BUDGET?
A budget can be as simple, or as complicated as you wish it to be. For our purposes I'm gonna use an imaginary friend, his name is Jerry. Jerry has been living on his pay cheque for about a year now, but has never made a budget. Recently Jerry decided that he wants to be rich, VERY rich, so he's making some changes. Step 1, he needs a budget. Now Jerry doesn't need an extremely complicated budget to start off, so he did it the simple way that many do, he got a pen and paper and started to write. To create a budget, you really only need two (2) things.
1. A list of your income
2. A list of your expenses.
It really is that simple, so Jerry started on his paper listing. Of course there are other ways to budget, Excel, thousands of apps, pay someone else to do it for you, LOADS of ways and we'll tell you more about them all as we continue this series, but simply writing it out is an easy way anyone can do it. Let's get back to Jerry.
Here's what he wrote:
Salary (after tax) - $100,000
Hustle (Jerry sells phone cards to his coworkers) - $2100
Total Income -$102,100
Savings (Jerry just started saving) - $10,000
Utility Bills (light+water) - $4000
Internet (Flow Rave) - $4427
Cable (Flow Basic+ Sports) - $4000
Phone Bill (Digicel 2GB Data) - $6000
Groceries - $15000
Haircut - $500
Commute (Jerry takes a cab to & from work) - $20,000
Entertainment - $25000
Total Expenses - $88,927
So, what does this tell us (and Jerry)? Well, for starters, Jerry has a surplus, which means that Jerry has money left over when he subtracts his total expenses from his income. His surplus in this case is $13,173. If his expenses were larger than his income then he would have a deficit, which is a popular problem.
Ok, so now that Jerry has a budget, he knows where to start on his journey of getting rich. This is where a budget shines, it allows you to plan as far in advance as you want and as you can see, writing a budget can be a very simple but fulfilling exercise. Any goal you may have, once you can get an estimate of how much it'll cost, you can use your budget to tell how long it'll take you to get to your goal. Jerry has decided that he wants a few things for himself, and we're going to map his journey out through this series.
Let's apply the first step he's learned here for ourselves. Download the attached file and fill out each column with your own data, and see what the results are. If you would rather do with Jerry's method, then grab your pen and paper and get writing.
Remember, all you need for a budget are the following 2 things:
1. Your Income
2. Your Estimated Expenses
You subtract expenses from income to determine if you have a surplus or deficit, and you come back here for the next blog in this series detailing what to do if you have either of those.
See you then!