THE PERSONAL FINANCIAL BUDGET
Individuals live in economically challenging times and to make sure that they survive and prosper they need to adopt a tool long used by governments and business, “The Financial Budget.” This technique empowers consumers to manage and control their finances, and to make knowledgeable confident save /spend/ borrow decisions. The overall concept is look into the future, estimate your income and expenditure, put the two in balance then affect them in practice. A sensible period of time to budget over is a year. Income is usually predetermined. You know what you salary is going to be, and if you run your own business what the likely profits are. If relevant, pension income and savings on interest need to be included. The expenditure side is more difficult, because there are more categories. Start with the main categories of expenditure: housing; food clothing and essentials; transport; health; and education. Then consider the servicing of existing debt and taxation. Finally look at discretionary expenditure: holidays eating-out and entertainment. Simple spreadsheet tools are available to help you do this. The next step is to compare the two totals. If the income budget exceeds the estimated expenditure then the prudent action is to plan to save the surplus. Ideally divide the surplus by 12, and commit to a monthly savings plan at that level. If expenditure exceeds budgeted income then more painful planning is required. Non-essentials need to be reduced, for instance plan to eat out once a month instead of every two weeks, or decide to go on holiday for only one week instead of two. Unfortunately for some consumers, cutting out all non-essential expenditure still won’t bring the two into balance. If this is the case then revisit the expenditure categories and seek reduction. Travel could be cut in some circumstances by selling the car and using public transport. Food costs can be reduced by planning to buy more at markets and discount outlets. Expenditure on the budget must never be allowed to exceed income, even if this means identifying the need for additional part-time work to supplement income, or even in extreme case selling assets (downsize the house or selling the car.) The last step is the hardest, making the budget work in practice. You must divide the annual budget expenditure categories into monthly amounts, and stick to them in practice. Obviously not all expenditure will fall into equal monthly amounts. Essential car repairs may eat up two months of the travel budget, but if you have anticipated this in your annual travel budget it will be catered for over the year. Financing this may require some savings drawdown or resort to a small short-term unsecured loan. This is permissible provided that repayments are effected within the annual budget. If the budget is failing because for example you have underestimated expenditure, then you need to take drastic action and redo it with more realistic figures. At the end of the year, the budget won’t have worked out exactly. If there is a small surplus why not reward the family with a special treat? If there is a small deficit then carry that forward and recover it in next year’s budget. When you do next year’s budget you will be able to build on your experiences in the first year and the process will be quicker and more accurate.