11 Jan 2013

Budget P1 - How to start

It's a brand new year. I personally tend to look at new years as a fresh new outlook, a new beginning, a starting point, an opportunity, make resolutions ... you get my drift.

The new year is also the time of year I update our home budget .... *yawn*. I know doing a budget, let along reading about one is as interesting as watching paint dry. But I challenge you to stay with me, continue reading and maybe you might find the motivation to do one properly or gain some tips to improve how you currently do your budgeting.

What is a budget? 
It's a document used to project future income and expenses.

Why put one together? 
So you can see where your money is coming from and know where it' all going.

How do you put a budget together?
Before you get overwhelmed by numbers, spreadsheets, document formats or the amount of detail it needs to have ... stop, take a step back and breath. The challenge of putting a detailed budget can be very daunting, depressing and hard but before you start here are my tips on how to ease the initial process:
  • Get everyone who works and contributes to the cost of running the home together in a room and explain to them you want to put a detail budget together. Understanding the family budget is everyone's business, not just mum or dad. My parents had a friend whose husband died at a young age of fifty. He was healthy, full of life but unfortunately suffered a heart attack whist running on a treadmill. One of the biggest challenges she faced after his death was understanding who they owed money to and why. Her husband always looked after the finances, she never participated or tried to understand how he ran the family budget. Getting everyone involved is good money practice, makes everyone in the home accountable and by having everyone present whilst putting your budget together allows you to identify everything that needs to be included.
  • Pre planning: before you start writing down figures, identify groups of spend and income. What I mean by this us start brain storming categories for your expenses. Some suggestions are: loans, credit cards, utilities, home expenses, car expenses, insurance, transport, entertainment, technology costs, memberships, education etc.  
Creating a Budget 
1) Identify all incomes. Obviously this would be salaries, wages, rental income from investment properties (or kids), repayments from personal loans to family members etc. Write these amounts down and the frequency you receive these amounts.

Tip: For salaries only consider your post tax money this will assist in ensuring budget figures are correct. Your pay slip should indicate this amount, if you're not sure how to determine that from your pay slip it's the amount your employer deposits into your bank account at every pay day.

2) Once you've completed the identifying categories, its time to list items for each of the categories you've identified. Again, don't worry about the figures just yet, just brain storm all costs associated to each categories. Example:

Some categories may not have sub-items and that's okay too.

Tip: Really think hard about all the costs associated to each category before moving on to next category. The amount of expenses you identify will assist in ensuring the accuracy of your budget.

4) Once you've listed all known or obvious items associated to your categories start thinking about you and your family's life style and what you spend your time doing. Identify those day to day activities and start thinking about whether there are any costs involved. List all associated expenses involved in that activity onto your budget. Do you eat out a lot? Do you buy coffee or lunch everyday? Do your kids have extra curriculum activities? Do you have a hobby you regularly buy supplies for? An example would be gifts purchased for birthday events, its an expense we all fork out for but not a lot of people include it in their budget.

5) Once you have identified all items associated for each category, its time to start writing down the actual cost for each item. This process might take you a while, don't just guess the amount really source out the actual costs for these items. Find receipts, locate last year's budget or go to your online banking and find the transaction, given you used an electronic form of payment ie credit card, bpay or transfer. Again allocate the frequency of these expenses. For items that have a different amount each time and unknown frequency ignore for now and come back to it later on.

6) After you have written down the cost for the items you definitely know the cost of, go back to the items you are unsure of and make a calculated guess. What I mean by calculated is go back to previous transactions and review how much item usually cost you and frequency. For example putting a full tank of petrol for our car usually costs us $70 and we fill up an average of once a month so petrol I would allocate $70/monthly for this expense.

7) Include (if you haven't already) a "savings" item in your budget. You should treat your savings as an item in your budget, don't forget to pay your self! You work hard for your money you should invest in yourself. The amount you specify under this item is the amount of money you would like to save or currently saving every month.

Tip: You might want to make this a category in itself so you can have multiple saving items. For example you may want an item for holidays, children's education fund, emergencies, deposit for a home etc.

Next post I will provide info on how to collate all the information to allow you to see how much you're spending versus how much money coming in.
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