Whenever someone comes to me with financial problems, the first question I always ask is this: “Let me take a look at your budget.” You see, theoretically, a person’s budget would contain all of the information needed to figure out their personal finances. Simply, it would show money-in, money-out, and help to pinpoint the best places to tweak either. Here’s the thing, though…
The vast majority of people who come forward with financial problems don’t have a budget! With that first question, we’ve pretty much nailed down the source of their woes. No budget means no control over cashflow, plain and simple.
Now, I’ve often asked these folks why they never bothered to make a budget and the answers are often the same. Amusingly, the most common reply is “I don’t make enough money to need a budget.” I always have to laugh at that one, because the less money you have, the more you need to keep track of it.
If your wallet is spilling over with hundred-dollar bills, you might not care about leaving a couple extra bucks on the table for the busboy…but if you’re scratching together change from the console of your car to buy a 99-cent cheeseburger, you want to be able to account for every dime!
Why does a budget matter?
It’s fairly simple. A budget helps to make sure you always have enough money to cover the things you need by tracking your income and comparing it against expenses. A budget is both a roadmap and a balance sheet, making sure that you’re taking in more than you are spending while helping you to plan out how that money is being spent.
The amazing power of seeing things in writing.
One of the things that makes a budget such a great money-saving tool is that it forces you to come face-to-face with your expenditures. Think about how many subscriptions, recurring payments, and monthly dues are coming out of your bank account each month …and thanks to automatic bill payment services and online payments, these charges are often being paid with no statement, no reminder, and nothing to alert you of these expenditures.
Subscription services love this. In fact, you probably already know how notorious gyms are for signing people up and then making huge profits on the contract payments (whether the person comes in or not.) Services like Pandora, Netflix, Hulu, and dozens of others work the same way. They get people to sign up with a free trial, then by the time the first charge disappears quietly from your bank account, you’ve already forgotten that this service is actually costing you something.
A budget that details your expenses each month prevents this from happening to you. No longer will you be apathetic about charges because you’ll be seeing them in vivid detail every time you look at your balance sheet! Better yet, when a household sees how all of these “small” subscription fees add up to over the course of a year, they often discover an easy way to free up thousands of dollars.
Budgets: The Only Way to Save!
Many people approach the idea of saving with the “I’ll save what’s left over” mindset. Guess what usually happens there. At the end of the month, there’s never anything left to save.
The way around this conundrum is to add a line item to your budget for savings. Add it before discretionary money kicks in. Don’t save what’s left over…save first!
With a properly-planned budget, anyone can improve their financial situation. Get started on yours!
Using a Credit Card as a Budgeting Tool
Many people can easily overlook how credit cards can be used as a tool to manage your household budget. If everything were paid in cash then it would be necessary to retain and store all the receipts to record all the transaction details onto a spreadsheet.
This can be very time-consuming and it is quite likely that a receipt will either not be issued or it will be mislaid on the journey home from the store.
However, a monthly credit card statement captures all this information for you so that you can easily review your spending at a glance. A number of credit card statements now also categorize the spending into various logical pre-defined categories such as “Gas” or “Groceries” with a handy subtotal for the month.
Some credit card providers will even allow you to set up an alert which will let you know when your spending in a certain category has reached a pre-set limit to ensure that the spending is well-controlled.
This may be especially useful if you have supplementary cards on the account and you do not control all the spending – the statement will automatically allocate the spending between the different cardholders so that it will be easy to see who the biggest spender in the family is.
Many statements are now also available online if you have online banking set up and can be downloaded into an Excel-compatible file so that you are able to manipulate the data into the format that you need, with the ability to not only track and analyse monthly spend according to your own choice of categories, but to do so on a year-to-date or even a year-over-year basis.
Credit cards can also be an aid to budgeting in terms of cash flow. Many Canadians do not carry a significant balance in their bank account. The interest-free grace period can be used to coincide payments with your payday so that you do not find yourself in an accidentally overdrawn position.
In addition, clever timing of significant purchases just after the end of a statement period, will maximise the length of time that elapses before you need to make a payment.