The basic principle to money management is understanding our income and spending patterns. Simple as it sounds few are those who actually plan what they can spend or dedicate time to understand their disposable income. The idea of saving is slowly being eradicated.
The crux of budgeting is all about making a plan of what we can spend and on what... and sticking to this plan. In the long run, budgeting simplifies financial matters, enables us to meet our regular commitments and provides us with the peace of mind that available funds will last us until the next pay cheque.
Regular budgeting helps us plan for the larger expenses and life goals such as holidays or a down payment on the first property, as well as retirement, no matter how far or close this may be. When we plan, we can better understand what is reasonably affordable against what can put us into excessive debts.
Where does one start with budgeting? The first step is evaluating earnings. For some, this may be standard from month to month, while for others this may vary and will involve making an estimate, working on an aggregate amount and different scenarios. Regular expenses such as loan repayments, monthly provisions, telephony contracts, utility bills and tuition need to be accounted for. Irrespective of the amount, if it is regular, it should be listed.
The next step is to consider larger expenses such as insurances. When unplanned, these may create a financial burden. One way for managing these irregular but often larger expenses is to add them up and contribute towards them on a monthly basis. For example, the total expense for the annual car licence, insurance and a planned holiday add up to €2,400. If we put aside €200 a month, the burden will be distributed and once these become due they can easily be paid without any shocks.
Part of the budgeting process is setting a portion of our earnings aside for a rainy day or for unexpected costs that crop up
Part of the budgeting process is setting a portion of our earnings aside for a rainy day or for unexpected costs that crop up throughout the year, be they related to our homes, cars or other personal expenses. Should expenses, including the savings put aside for that rainy day, work out to be higher than earned income, then we may need to question whether we are living beyond our means.
Expenses may need to be rethought, small adjustments to our spending patterns can make a big difference. The first attempt at working out a budget may not be perfect, it will probably never be, as new expenses cop up and certain bills can only be estimated. Nonetheless we can fine-tune our budgeting system as we get more accustomed to it. Today there are numerous apps that simplify the budgeting process, alternatively a simple spreadsheet can do the work.
It’s never too early to start managing money. Children should be introduced to this principle from an early age, even as soon as they start to ‘earn’ pocket money. This will instil in them the habit of managing money well, get them to think about whether to spend it all or save for their bike or that dream gadget.
Managing money well may cost us time, but it is well worth the price of obtaining financial freedom and peace of mind.
This article is not, and nothing in it should be construed as a recommendation in respect of investment products or services offered by the BOV Group. Any views, assumptions or opinions expressed in this article are those of the author. Value of investments may go down as well as up and may be affected by changes in currency exchange rates. Past performance is not a guide to future performance.
Claire Falzon, Financial advisor and manager, BOV Investment Centre