In the new year many people set resolutions for things like getting fitter, getting slimmer, getting richer and the like. Well if your resolution was the latter, the first step for you is to create a plan – aka, writing a budget.
Writing a budget helps you to recognize what money you have and where it is going, which is the first step to being in better control of your currency. Earning more is great, but unless you understand your cash flow you will only waste the opportunity… So let’s get started!
Step 1: Current Spending
The majority of people actually have no idea where their money goes, they know roughly what the big costs are, but when you actually work it all out you might be quite surprised by how much those little costs add up.
The first step is to list your regular costs – rent, heating, car payments etc. Go through your online banking and list all of them. These are the things that are most predictable, so they give you a good starting point.
Needless to say, if you find any payments that you don’t know what they are for, find out pronto, and cancel any that are no longer needed (assuming you are not tied in)
Step 2: Day To Day Spending
The next thing you need to work out is what you spend each day. This is harder to work out, but the best idea is to go through your statements for at least 3 months and note every spend and what it was for.
Put these items into categories such as; work lunch, eating out, entertainment, groceries. The more specific the better.
Finally, you can total up your spending and average it out to figure out a monthly cost.
You should also make sure you take into account any annual vacations, it is best to split flight ticket costs, foreign currency, hotels etc over 12 months to get an average spend – otherwise you might find your summer break takes you into the red.
Step 3: Income
This bit is easier of course, just write down your income – try not rely on unpredictable income if possible (such as Christmas gifts, annual bonus etc), if a lot of your income is non-guaranteed like this you will need to allow a buffer to allow for unexpected drops in income.
Step 4: The Bottom Line
Once you have all of the figures it is simple enough to work out your bottom line. Hopefully the number will be positive, if not though, you had better make sure it becomes positive.
Look through your spending first of all and see if there are any areas where you have been spending more than you expected. Can you cut down any where?
Taking steps like making lunch for work rather than eating out can have a big impact and don’t really affect your quality of life.
The more negative your balance the more ruthless you need to be. Ideally, you want to have at least 10% of your income left at the end of the month to be able to call yourself financially secure.
This is a post by Mark from Currency Converter.
