Yeah, I know. Creating a personal budget sounds boring, and is probably something your parents did when they were younger. But it’s still considered the best way for people to manage their money because it helps them keep track of where it’s all going.
Unfortunately, a lot of people have given up on creating a budget. They think it’s way too complicated to set up, and isn’t worth the little (if any) benefit they get out of it.
But creating a personal budget doesn’t need to be complicated. And the benefits it can provide certainly make it worthwhile. You just need to find the method that works best for you.
Here’s a simple strategy for managing your personal finances.
1. List all of your expenses. Start by listing all of your expenses for each month—rent/mortgage payments, food, utilities, etc. Don’t forget the events you have to spend money on, such as birthdays, anniversaries, holidays, etc.
2. List all of your income. Next, make a list of all the money that comes in each month—wages, government assistance, etc. But don’t include any bonuses or other one-off payments unless you know you’ll receive them, or you may end up spending money you don’t actually have.
3. Create a budget. Now it’s time to sit down and create your budget. Don’t think of it as the fun police putting an end to all your fun. Just think of it as a guide to help you manage your income and expenses each month.
Once you’ve mapped out what’s coming in and going out for each month, look for months where you think you’ll have either a cash shortfall or a cash surplus. Then look at the overall figures for the year. Do you have enough income to pay all of your expenses?
More money coming in, less money going out
Of course, if your expenses are on par with your income, you won’t be able to save much money. So you need to reduce your expenses or increase your income. And ideally you should do both.
4. Reduce your expenses. This is what stops a lot of people from sticking to (or even creating) a budget. They think “reducing expenses” means “never going out with friends” or “giving up everything I enjoy”.
But it doesn’t have to be like that. Yes, you may have to eat at home more often instead of going to restaurants, but you can still enjoy them occasionally. It’s all about moderation.
And reducing expenses doesn’t always mean cutting down on these “luxuries”. A lot of everyday expenses can also be trimmed. Here are just some of the ways you might be able to reduce your spending:
- If a low fixed interest rate is available, it might be worth fixing part of your home loan mortgage. It will help stabilise your costs over the next few months and keep them down in the long term, which could save you hundreds (if not thousands) of dollars a year.
- If your mortgage’s fixed interest rate is high, it might be worth trying to renegotiate your loan.
- Are you paying for health insurance you don’t need? What’s the point of having all those extras if you never use them? A number of online services can help you find the health cover you need for the best possible price.
- What about your car, home and other insurance packages? Yes, you need to make sure you and your family are covered if anything goes wrong. But sometimes these packages include cover you simply don’t need. For example, we had travel insurance removed from one of our policies because it was already included in another.
- Look at your latest electricity bill. If you’re not getting a loyalty discount you may get a better deal with another provider. And don’t forget to check out whether you can take advantage of cheaper tariffs.
- Do you really need your Pay TV and glossy magazine subscriptions? Are you getting your money’s worth out of that gym membership? If not, get rid of them and put the money words your other expenses.
- If you’re paying off multiple debts from various sources, you may want to consider getting a consolidation loan. You’ll be able to combine all of your debts into a single loan with a single monthly payment, which means:
- you’ll reduce your monthly payment because it will be one large loan spread out over a longer period.
- you'll reduce the amount of interest you pay because you’ll only have one debt to pay from one provider. This will both reduce your expenses and increase your income.
And if you have enough assets to get a secured loan, you may also qualify for a lower interest rate because you can offer your lender some security to back up the loan.
5. Increase your income. Okay, this might be easier said than done. But see if you can secure some extra hours of work, or maybe even do a bit of consulting for some extra money.
And if you run a business, you might be able to restructure the work so you can secure more jobs of higher value.
Finally, once you’ve set up your budget you need to review it regularly. Are you meeting your spending goals each month, or are your expenses still outgrowing your income? Are you managing to save money? If so, how much? And what are you doing with that money?
Need more help?
Creating a budget and then sticking to it diligently isn’t easy. You need to figure out what to include, review your expenses and track your spending. And if you’re thinking of getting a consolidation loan, that’s something else again.
If you’d like a hand with any of these, get in touch with one of our budgeting and personal financial specialists at Gill, McKerrow. We love helping people take control of their finances so that they can start achieving their financial and personal goals.
And we’d love to help you, too.