How To...Create A Budget

In these days of economic crisis and uncertainty, people are re-evaluating their spending habits.

Here are a couple of tips on how to budget.

The first thing to do is to create a budget. There are many ways to do this, ranging from the extremely simple to extremely complex.

Many of you non-financial types out there may cringe, thinking "I'm hopeless at this stuff". Well guess what, I'm totally not a financial person, and if this has worked for me, it can definitely work for you!

There is a range of software tools, both free and paid, which could be of assistance; depending on how financially savvy you are. However, the downside to this is you have to understand how the application works. This in itself may take so long and be so frustrating that you may feel like giving up. So if figuring out how software works is not your thing, then the KIS rule will definitely help (Keep It Simple)!

First, decide if you want to use a simple spreadsheet or even a basic notebook - pick whichever you're most comfortable with.

Step 1 : How much to you have to start with?

Start by working out what your take-home salary is. Meaning, take your salary and minus all the deductions that are made upfront by your employer, business partner or otherwise. Say this amount = [X]

Step 2 : How much will you have left over per month?

From X, work out what your recurring monthly expenses are; monthly bills, rent payments, home and car loan repayments, gym subscription, transportation & fuel, etc. In other words, bills that recur monthly. Say this amount = [Y]

Now, minus [Y] from [X].

Let's call the resulting figure, [Z]

Step 3 : Amortising your yearly or other recurring expenses

Wait! Before you think "Great, now that I've deducted all the monthly expenses I have all this money to spend!", not so fast. You still have to identify your recurring expenses. These are basically expenses which may not occur monthly, but they occur annually or following some other schedule. This category would include quit rent, assessment fees, income tax payments, insurance, road tax and other mandatory fees and charges.

The tendency for most people is to not pay any attention to these expenses until the bill arrives in the mail, upon which they freak out. "What am I gonna do? I don't have $1200 to pay that bill!" they yell. Well sure, the truth is, no one has an extra $1200 to pay a bill if it just floats down from the sky into your trembling hands!

But what if you had already planned for that bill, and had broken down that $1200 into monthly payments of $100 per month? And what if you had put aside that amount into a separate account or even in a jar under your bed, in anticipation of this $1200 bill? Would you have enough, and not need to eat into this month's budget?

The answer is "YES"!

Step 4 : Living & Saving

OK, NOW you're ready to work out what you've got left to live on - food, clothing, entertainment, etc. Out of this amount, you've got to prioritise along these lines:

i) Food/groceries & medication

ii) Transportation costs (essential, such as transport to and from your job, petrol, car maintenance)

iii) Savings (ensure that you put aside as much as you can from the remainder, into a savings account)

iv) A little extra for medical or other emergencies

v) Purchases/shopping & entertainment and non-essential expenses.

One of the best ways to work out how much you have for all this is to create a 4-columned spreadsheet with the following columns:

ITEM CASH ITEM CREDIT

Under these columns, you'll key in every single purchase or expense you've incurred over the last month. From here, you'll be able to track your cashflow and spending habits. Mark essential purchases/expenses, "E". Mark non-essential purchases/expenses, "NE".

Once you've done this for even one month, you'll finally realise just how much those Starbucks Lattes, new handbags and other frivolous expenses are costing you!