written by: Ritchie Cruz, Principal Director
“My problem lies in reconciling my gross habits with my net income.” ~ Errol Flynn
More often than not, our lifestyle dictates our budgets. We get the pay rise we want, but how quick do we find a use for it? How many times have we said “where does my money go”? As an accountant, I have heard that phrase from people of all ages, all positions, all stages in life. Money is something we all use, but not often truly understand. Robert Kiyosaki teaches us that the understanding of money separates the rich from the poor and the middle class.
Budgets are an essential part of money management. Understanding your budget is key to your financial education. This includes both setting and keeping your financial goals. A personal budget is not difficult to set up and maintain, nor does it need to be complicated. A simple budget is simple to understand, and more importantly, simple to keep!
Here are 5 important reasons for keeping a personal budget:
Understanding yourself. The starting point of your budget should be the review of your actual expenditure. Yes, you read that correctly. You need to look at your actual expenditure before setting a budget. You’ve heard the saying “tell me your friends, and I’ll tell you who you are”, well similarly, show me your budget (or actual expenditure) and we can tell you who you are. Looking at your actual expenses can help you understand yourself, your wants, and what drives your decisions. Everyone is different, so everyone’s spending patterns are different. Gaining an understanding of what drives your expenditure, will go a long way in setting an effective budget.
Save for important goals. Setting goals is the most effective way to achieve something. It’s no different for financial goals. Without a budget it is difficult to track progress towards a goal. Having a personal budget is the means to making it happen. It’s a pathway, or directions to reaching the goal. Managing a budget each week or month will show progress and allow for necessary adjustments to income or expenditure, in order to ensure the goals that have been set are reached.
Builds discipline. Budgeting is a discipline. It takes commitment and perseverance in order to see it through. Knowing how income is spent and how much is allocated for certain expenditure, makes it easier be disciplined financially. It’s like losing weight… you need to be committed in order to see results. Reducing spontaneous and impulse buying will save a significant amount of money over the course of a year. This does not mean that you cannot enjoy your earnings. It just means that you need to plan for it rather than having your wants dictate your decisions. Just like losing weight, you don’t want your habits or cravings ruining your progress. When spending is tracked closely, goals are clear. Seeing the benefits of discipline will become much more apparent.
Measures progress. In order for goals to be successful, they must be measureable. A personal budget measures progress in regular intervals. Similar to doing a “weigh in” every week, a budget can measure your progress towards your financial goals.
Reduce reactionary spending. Without a budget, there is no control. Spending will be reactionary, and your “wants” will dominate your buying decisions. This creates a spiral until there is little or nothing left at the end of the month for savings. You may even end up asking yourself “where did my money go?”. After a year, you get that pay rise and the spiral continues… every heard of the saying “more money, more problems?”
A budget is a tool. Maintaining a budget is a discipline. Keep to your budget, and reach your goals.