Budgeting basics: Part 1 – Myth busting and starting out

To kick things off, we are going to begin with the most basic building block of financial decision making and hopefully dispel a few myths at the same time.

This is going to most likely be a multi-part series, as the overarching topic is vast and there are a lot of interesting points to discuss.

Without further ado: Budgeting.

When most people hear the word ‘budget’ they tend to immediately sigh. Much like when they hear the word ‘diet’. A wash of disappointment comes over as you think to yourself “Really? I don’t want to have to budget, I pay my bills and I do just fine without it!” If that’s you then newsflash: that means you’re already budgeting without even realising you’re doing it (for better or worse)…

At its core, a budget is an estimate of income and outgoings for a fixed period of time. It’s got a pretty bad rap over the years, especially with my peer group, so let’s bust some of the most common myths that float around this obscure beast.

MYTH NUMBER 1:

“Budgeting” is simply another word for restricting your spending. VERY MUCH FALSE.

I think this is the most common misconception and quite possibly my biggest pet peeve on the subject. Much like how people misuse the word diet. As I referenced earlier, someone saying “Did you know I’m on a diet?” may as well actually be saying “Did you know I eat food and drink liquids?” Thanks Captain Obvious. Much like a diet is simply what you may eat, a budget is simply what you may spend. There is no one forcing you to act on that information at all.

MYTH NUMBER 2:

Budgeting is something to fear. FALSE.

Again, taking into consideration myth number one that we just busted, we need to remove anxiety and fear from the word. Arguably some people will be scared to find out about what shape their finances are in, but the sooner they find out, the sooner they relax or get to work.

MYTH NUMBER 3:

Budgeting can help you to save money. TRUE.

Whilst it is not a guarantee and arguably not even the primary function, a solid budget will let you review all of your outgoings and spot any major cash leaks. Countless people seem to have paid-for subscriptions that they just let run when they don’t even use them; to quote a friend of mine “It’s only a fiver a month…who cares…” At least this friend was aware. Ask yourself how much you spend a month on non-essentials. Is this something you can answer honestly? If you’ve never tracked your expenses, you’ll probably be in for a shock.

MYTH NUMBER 4:

Budgeting is a gruelling task. SOMEWHAT TRUE, BUT ONLY FOR ROUND ONE.

Unfortunately, if you’re starting with no information, it’s going to be a bit of a drag. You’re going to have to draw up a list of everything that goes out (you should hopefully know what comes in) and see how much of that is fixed – things like your rent/mortgage. Admittedly, this can be a nightmare, but the sooner you do it and get your head out of the sand, the sooner you take the first step on the long path of financial success.

Hopefully that has convinced you to get a handle on your finances and draw up a budget.

There are several tools and fancy apps that will help you do this (some of which are free!) but I think that there really is no substitute for a good spreadsheet. I personally use Google Sheets, as I like to be able to edit from within Google Drive, but Excel does the job too.

This spreadsheet will act as your stepping stone from here on out and it will become your personal financial bible. We will add many more sheets and functions, but it will all begin here. Don’t be daunted by functions if you’re new to building spreadsheets, this first task is a simple one.

N.B. If you pay bills as a household, include everything the household earns and spends, if you pay a portion of the bills, just record that.

Begin by listing the following, based on a single month:

  • Your/household actual income – this is the net amount you actually get in your bank account to spend. If this varies, make a sensible estimate.
  • Every fixed expense you are responsible for- this includes utility bills, mobile phone contract etc. Add in the other stuff like Netflix and Spotify if you have those, they are fixed even if they can be cancelled.
  • Every fluctuating expense you are responsible for – it is unlikely you will spend identical amounts on food each week, but you should be able to estimate a rough figure (always estimate up, not down) based on last month’s bank statements.
  • DO NOT include discretionary personal spending or savings just yet*. – If you spend money every week on takeaways and vending machines, don’t make a category for that.
  • Everything that is left over when you take the expenses from the income.

*Dedicated savings and personal spending allowances will not come into factor just yet, as they are going to be worked out, using your income, in the future. This is contrary to almost every budgeting guide on the net, but I think my method is far superior and much better for building strong habits.

At its core, you’re now done with part one. You’ve just made a budget that clearly shows what is coming in and what is going out. As we have focussed on your major bills, this budget cleverly shows the bare minimum you currently spend every month to continue to eat food and have a roof over your head. Budgeting really is quite simple when you get down to it.

Here is an example (using fictitious data) of how your new sheet could look:

Budgetsheet1

I included the remaining row to see what is left over after the essentials are paid for.

Now that those are down on paper, you should be able to appreciate just how easy it will be update bills in the future as they change and add in new ones as they crop up.

Managing this in an efficient and easy to understand manner makes it so much easier in the long term (and much less of a chore, too!).

If you want to learn more about budgeting, continue on to Part 2.

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