Creating a written budget

ARE you bored or excited at the prospect of learning one skill that can propel you to tremendous financial health? I find budgeting terribly tedious. Sigh!

That’s why it makes sense, I think, to begin developing this essential skill by first establishing a CFS or cash flow statement, with two separate halves: Your cash inflows and cash outflows.

You see, the starting point of your budget should be all the inflowing cash you have for the month.

It is the total of all your cash inflow line items in the top half of your CFS, probably comprising salary, allowances and business income; AND interest, stock dividends, unit trust distributions and rental received in that month.

For all of us with more than just a single fixed net salary inflow, that total will fluctuate every month. That’s why each month’s budget will be unique; similar but never identical.

Below that inflow figure will be your many outflow line items for which you spend money on. Before I dive into those details, here’s my ironclad guarantee:

Even if you find budgeting tough, if you work hard at fine-tuning your written budget AND then toil harder at sticking to it day by day, week by week and month by month (remembering each month’s budget will require customisation), your life will get better.

Just remember to cut yourself plenty of slack. You are not made for your budget; your budget is made for you.

So, when you find yourself going overbudget in one category, say groceries, yank out your written budget for the month and:

1. Identify your over-expenditure, say RM120 for groceries; and then

2. Figure out which other categories you’re willing to slash allocations for this month to make your numbers work, perhaps RM50 from your clothing line item and RM70 from your book-buying monthly budget category.

This seems simple. And it is, on paper.

Root of prosperity

In real life, though, if we don’t exercise some self-discipline, we will consistently overspend and burn through cash we’ve allocated to savings in the bank or investments in a portfolio OR rack up more debt, perhaps on a credit card with an unpaid balance on it, which should be paid down and not added to!

By the way, I’m not speaking theoretically. Financial mistakes like these are why I ended up with major credit card problems not once, but twice in my life; first, in England in the 1980s, and, again, in Malaysia for part of the 1990s.

In this matter, at least, I am an expert because of my stupidity.

So, let’s get serious as we consider what someone decidedly smarter, 19th century UK Prime Minister William Gladstone, thought:

“Budgets are not merely affairs of arithmetic, but in a thousand ways go to the root of prosperity of individuals, the relation of classes and the strength of kingdoms.”

step by step

That’s sage advice. Therefore, despite (or perhaps because of my) huge financial missteps, allow me to get you started on preparing a viable written budget in 10 sequential steps:

1. Buy yourself a small notebook that fits into your shirt or blouse pocket;

2. For two full months, at least, jot down in your notebook every out-of-pocket cash expense, every debit or credit card charge, and every online bank payment;

3. After the first week of tracking, analyse your daily total expenditure and your weekly expenditure by category;

4. Turn the entire process into a game to see if you can spend less each day or week than you did in the preceding one. Don’t be too hard on yourself, though, and do reward yourself with a cheap treat each time you rack up a win;

5. Remember to record the cost of your treat, though, in your notebook;

6. After two months of this record keeping, you will have a better sense of what you spend your money on and why! Then start writing or typing out your budget;

7. Take time to check the last 14 months of bank statements, cheque stubs and credit card bills to accurately identify your lumpy quarterly, half-yearly and annual expenses;

8. For each non-monthly expense, add a budget line item “expense” to transfer money into a general sinking fund (GSF) in a bank account that’s separate from your usual transactional account. Then transfer the correct monthly fraction of each such expense (1/3, 1/6 or 1/12, respectively, of each quarterly, half-yearly or annual lumpy payment). When a lumpy payment comes due, withdraw the money from your GSF;

9. Write or print out each month’s budget at the end of the preceding month, fold it into a crisp square and carry it with you tucked within your notebook (if you find yourself addicted to the good habit of recording your expenses in it) or inside your wallet or purse;

10. Adjust and tweak each monthly budget till you morph into an adept (and richer) manager of your own money.

Sadly, these 10 steps are too much work for most people. They will shrug off this advice and do nothing; their lives won’t change. But some will try a few steps and benefit from those.

And a few will do all the suggested work and find themselves in superb financial shape one year from today.

Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com You may follow him on Twitter @RajenDevadason