Today's lesson: budgeting
BUDGETING: it’s a simple enough term. But what exactly is a budget? Even if you have a good idea of the answer to that question, do you have one?
Standard dictionary definitions describe a budget as:
- An itemised summary of estimated or intended expenditure for a given period along with proposals for financing them;
- A systematic plan for the expenditure of a usually fixed resource, such as money or time, during a given period;
- The total sum of money allocated for a particular purpose or period of time.
Examine spending habits
Creating a personal or household budget requires an examination of spending habits – and highlights how we could improve them. There are many tools available to help us create a budget. An online budget planning tool, such as mint.com, is worth a look, but flashy spreadsheets and software packages aside, nothing beats sitting down with a pen and paper and examining your current and desired financial position. Commit a couple of hours to the task, and you could soon see your net wealth soar.
Budgeting can be a really helpful exercise: if completed honestly, it can prove a great reality check. Just analysing how we spend our money is a powerful way to reduce financial waste.
Daniela Bovell, a 29-year-old British expatriate, who lives in Dubai Marina, recently completed a budget, based on a similar template to cashy’s.
“When I first did my budget, off the cuff, it all seemed pretty rosy, so I couldn’t see why I was so poor at the end of each month,” she says. “Then I kept a diary of my actual variable outgoings for a couple of weeks, which painted a more truthful picture, and when I revised the budget accordingly, I was shocked."
Once you have a clear idea of what you’re spending your money on, ask yourself: is it all necessary? Where can I cut back to increase my savings, or more importantly, pay back any debt quicker?
“It was quite evident that my leisure outgoings – mainly on eating out – were far higher than I perceived," said Daniela. "Even worse, I knew the money I was spending on my weekly shopping was going to waste, as I invariably threw most of that food away.
“Now, I shop smarter and take a packed lunch to work four days a week. I have an allowance for lunch out with colleagues once a week. I adjusted some of my other variables, like stopping the gym membership I didn’t use (I now run on the beach instead) and have managed to save more than the target I set myself in my adjusted budget.”
So, overall, what should you aim for? In general, you should expect to spend around a quarter of your income on housing – so rent or your mortgage. As property prices fall to more acceptable levels in the UAE, apply this rule ahead of your next property move.
Another school of thought suggests we should aim to spend 60% of our income on necessary living expenses – accommodation, bills, food and clothing. The other 40% should be dedicated to irregular expenses, such as holidays, leisure costs and, of course, long-term savings.
Devise a budget plan that realigns your priorities and follow it – checking regularly to make sure it’s manageable. Stick a copy of your budget in a visible place in your home. Refer to it regularly and make necessary adjustments when your income or expenses change.
If you overspend in one area, include the increase in the next month’s plan. Alternatively, cut back on another area. For example, if you overspend a certain sum on food shopping in any given month, because you’ve hosted a dinner party, spend the same amount less on eating out that month.
Keep a cushion
If an unexpected expense arises, you could have what is known as a cash-flow problem. Account for a cash cushion in your budget. If your income is even just 5% below your monthly expenditure, that’s a handy 5% to have for emergencies – or savings if you don’t need it.
A handy tip that will help you stick to your budget is to use envelopes. Write each expense category on an envelope and divvy up your money accordingly. If your “shopping” envelope fund can’t afford those shoes in the third week of the month, you just can’t have them – unless you’re willing to take cash from your entertainment and leisure envelope, that is.
As with all financial planning, the aim is to reduce or manage your outgoings and increase your savings so that you can achieve your longer-term aspirations.
To focus on these, why not stick pictures of that dream holiday home or a retired couple sipping cocktails on the beach on your budget document? Whatever your goals, stay focused!
Have you set a budget? How easy did you find it to follow? Tell cashy below...