We hear a lot about "Budgeting" and sometimes it is used interchangeably with "Planning". However, there is a big difference between the two concepts and it is important to understand it. A plan is a vision, it looks into the long term beyond the period of just 1 year, it is the main purpose and goal. Budgeting on the other hand brings the plan to reality and normally focuses on a period of 1 year at a time. The budget will outline the steps you need to take to achieve your plan. Forecasting, is a process that is done during the year to review what has happened so far and ensure you are still on track to where you want to be. Allowing you the opportunity to make decisions and adjustments in order to stay on track both with your budget but more importantly with your plan.
Bringing this to our Personal Finances, we all have a vision of what an ideal lifestyle would look like for us however have we sat down and actually thought about how we are planning to get there? If you'd like to own a house someday, that's great but go a step further and put a number on it and research exactly how much your dream home will cost. Refer to the SMART goals I explained in my previous blog post. The next step would be to determine how much time will you need to achieve your goal? For the purpose of this example, lets say it will take 3 years to save up a deposit for your dream goal.
Budgeting will help you make sure you have a road-map to follow each year so that after 3 years you will achieve your goal/plan of saving for your down payment.
So how does setting a budget help you manage your household finances?
It helps you control spending by comparing your income with your spending.
It helps you check that you have enough income to pay current and future bills without having to borrow.
It shows how much ‘spare’ income or free cash-flow after covering your expenses.
It gets you to focus on whether you could make better decisions in the way you spend your money.
It lets you plan how to meet your spending goals and other financial targets, like saving.
Key Steps & Tips to a successful budget:
Once you have identified your goal then focus on the full year view to ensure you capture all your income and spending. Working to just a weekly or monthly budget may miss spending on holidays, gifts or annual insurances.
Start your budget with your income before moving on to your expenditure. Only include income that is certain or at least likely. Anything on top will be a pleasant surprise.
Break down your spending. This will help you see exactly where your cash is going if you find you need to reduce your spending.
If you’re not sure how much something will cost (like your phone bill) it’s best to overestimate and have cash to spare, rather than underestimate and not have enough.
Divide your spending between ‘essential’ and non-essential’. This really helps if you need to cut back on what you spend as you can start with the non-essentials.
Make sure you plan for reducing debt as this could slow down your journey to success
Do plan to have an emergency fund for unexpected expenses means you don’t have to panic an end up borrowing money or using a credit card.
Be flexible and do not make an extremely tight budget that will make you feel deprived and stressed as this will only cause frustration. The unexpected happens but just think of them as slight set backs and keep going. Finding the balance between living a happy life in the present and setting yourself up for success in the future is key.
Carrying out a budgeting exercise once is useful to help you to work out if your spending is under control, but budgeting is most effective when you use it as part of an ongoing process.
This is where forecasting comes into the picture. You need to have regular budget meetings with yourself to update your transactions and to see if you are still on track to achieving your goals. It doesn't matter if one bucket has overspend, so long as you under-spend in another. Just as it is okay to overspend in one month, so long as you under-spend in the following month.
If you'd like to start Planning for your financial goals, Budgeting a road-map to achieve them and Forecasting to make sure you stay on track. Then the Personal Finance Tracker I have developed and worked on for months is exactly what you need.