Budgeting

What is Budgeting all about?

Budgeting is the process of documenting your expected income and expenses for the period ahead. It is also known as your Spending Plan.

Sounds pretty bland and boring but once you go through the process it has a multitude of benefits for you and will usually reveal some really interesting numbers which will highly likely motivate you in action.

What is involved in creating a budget?

There are plenty of different approaches to budgeting but here I focus on one that is simple and effective.

The 50/30/20 Rule

It basically represents how much you should be spending in each category.

Categories Explained

50% Needs

Rent / Mortgage
Transport / Vehicle
Groceries
Utilities (Electricity)
etc.

30% Wants

Eating Out
Netflix
Entertainment
Holidays
Home Improvement

20% Savings

Retirement
Savings
Shares
Store Accounts
etc.

Steps to take:

Step 1:
Add Up Your Income

Identify all sources of income and add them up.
This can be your salary, interest earned, etc.

Step 2:
Document Your Expenses

List and add up all your expenses.

Best to do this month-to-month because you might have expenses that only occur once per year.

At this point split the expenses into Wants and Needs. Netlfix is not a need...

Step 3:
Set Goals

This is done for you on a high level already. The 50/30/20 rule:

50% Needs
30% Wants
20% Savings

Drill down on each line item that you have created and see where you can improve. This can be to increase your income, reduce expenses or increase savings.

Step 4:
Adjust the numbers

Firstly and most importantly check that you are not planning to spend more than you earn!

Deduct your calculated expenses from your income. Then make adjustments to the expenses as far as possible to get to the 50/30/20 rule.

This might seem impossible at first but this is your goal and it will become easier every year.

Step 5:
Review Regularly

I suggest that you look at your budget at least twice per month to capture the actual expenses to make sure you are still on track.

Time to implement this!

The tools I suggest you use are either Microsoft Excel or Google Sheets to create your initial budget.

There are great online solutions available but I find these, even when they cater for cross platform integration, do not provide the views and flexibility that Excel does.

It is also a good idea to represent the numbers in visual formats like graphs to make sense of them.

The picture below is the template I created and use. Once the data is entered I always go back to the graphs as a health check.

Creating the initial budget can be very time consuming and a daunting task if you are new to this. If you want to make your life a lot easier simply download my free Budget Template below.