Effective Budgeting Depends on Personal Planning

Unlike dieting fashions and fads, there is no particular budgeting technique that will automatically solve everyone’s financial situations. However, the one key element in every approach that makes a budget effective is when the spending going out is less than the money coming in. This is a key factor that allows successful families to save, invest, and spend wisely.

Budgeting properly requires people to understand two basic financial principles that are incredibly important: knowing where one’s money is going and cash flow. The first just requires sitting down and detailing every source of steady income in a month and how it is spent. However, the second is a bit more technical. It requires understanding when money comes in versus when bills or expenses are due. Becoming adept in both provides the tools in developing a usable, working home budget.

Budgeting 101

To understand one’s budget a person has to do some homework. This requires laying out every known paycheck and income source on paper on one side and every regular expense on the other. It’s a simple process of labeling each item and the dollar number that goes with it. All the income goes in the left column and all the bills and spending go in the right column. Then, with everything identified, the next step requires adding up the amounts in each column to get a total amount of income and total expenses. The exercise works better on a spreadsheet program which acts as a calculator as well.

If the income side is larger, then the excess is either being freely spent on discretionary items or it’s being saved somehow. A primary goal is to make sure the spending stays less than the income side. If expenses are more in total, then a person’s spending items need to be reviewed and trimmed.

Reducing expenses is not as hard as it seems. While everything may seem essential, there’s a lot people can do without. Gourmet coffee drinks every morning being cancelled can save a couple hundred dollars. Using public transport half of the week can save significant spending on auto petrol. Packing a lunch instead of eating out every day probably saves close $20 to $40 a week. As more savings are found, the trimming process gets easier with time. Alternatively, the income side can be increased by taking on more work or a second job, but that requires a time commitment not everyone can manage. Either way an effective budget is one where the spending is within the resources available each month.

Cash Flow

Even the most effective budgets can be ruined by bad cash flow management. Cash flow involves understanding when expenses occur in relation to when money is available to pay the bills. Many people find out the hard way and end up spending two weeks out of the month scrapping pennies, even when they make enough income to live comfortably.

Good cash flow identifies when money comes into a household and plans the bill payments accordingly. Instead of spending every dollar in the first week, spending is curtailed to leave enough cash available for needs the other three weeks of the month. Bills are consolidated if possible to reduce the number of disparate payment deadlines throughout the month. Many debt servicers are willing to change the date they bill as long as payments are made timely.

Additionally, smart cash flow management also anticipates irregular financial hits and puts money away for them. For example, a child’s school tuition may come due only once or twice a year. While there’s no cost other months of the year, smart parents save away so when the bill does come in August it’s easily paid in cash. A life insurance bill that only charges quarterly can cause similar havoc if not planned for. Planning ahead for when such hits occur makes them predictable instead of a headache.

Have an Emergency Account

Finally, really good budgeting includes having a safety net prepared for the unexpected. This involves having an emergency savings account with ready cash for the unpredicted event. Many times the situation may involve a medical emergency or immediate need that has to be paid in cash. With an emergency fund, a budget is not thrown upside down since the issue can be addressed separately, avoiding taking committed funds away from bills due.

A good rule of thumb involves saving enough in an emergency fund to be able to live without any other income for six months. While this amount is not realistically possible for many, it is a good goal to strive for anyways. Eventually, enough savings will build up to address most immediate situations effectively while still staying on track financially.

Fixed Income Considerations

For those on a fixed income, such as pensioners and retirees, having and sticking with a set budget is critical. Too often people start of retirement wanting to travel and enjoy time. The reality is, it’s easy to spend more than necessary when you don’t have to work eight hours of the day. This type of behavior can quickly burn down retirement savings faster than planned.

Instead, people need to set their retirement budget ahead of time and stick to it. That’s the only way to ensure the money saved for so many years lasts long enough to live comfortably.