Thursday, 1 December 2011

Before Budgets


Who needs them? While most financial planners / advisors / bloggers will insist that everyone must have a budget, I prefer to take the road less travelled. It is not that I do not believe in budgets or that I do not think that they have any value. Rather, I feel that budgets aren't the very first thing one should think of when trying to think about finances.

Here's why - How many people out there, who have never thought of or cared about personal finances (or even those that have) can realistically and with some degree of accuracy estimate what they will spend in the coming months. Can you estimate what groceries will cost you each month? Or your bills? Or Gas and vehicle maintenance? Or Eating out? Or Entertainment? Or Travel?

The only people that will come anywhere close to estimating these items correctly are not the ones that have a budget. Instead they are the ones that have given some thought to tracking their spending. If you have never tracked your spending, it is highly unlikely that you will be able to create a useful and effective budget.

To see the future, you must know your past!

So if you are looking to improve your financial situation, the first step is to figure out where you have been spending your money over the past year. How do you do that? In this highly electronic world, most of us use bank accounts and credit cards. Both banks and credit card institutions are fairly generous when it comes to keeping records (and so should you - but we'll come to that a bit later). Also most income you are receiving is likely going to go into your bank account. So your first destination should be your bank account.

The "Checking" account - Check the statements you have received from your bank (or view them online) starting from a year ago. You should be able to list every single thing that took money from your account. Any bills you paid from your account including utilities and credit card bills should be on there. Any cheques you wrote should also be on there. The only thing you can't figure out would be the stuff you paid for in cash. But you can get a good guesstimate for that as well. To pay for stuff in cash, you had to have withdrawn cash from the account. So just total up the Cash withdrawals and you have that information as well. It won't be 100% accurate since you may still have some cash in your wallet (or purse) and of course there is going to be some loose change lying around the house or in your car or in some jeans pocket. But it won't be a large enough amount to mess up your activity here.
Once you have tallied your bank account debits, you should have the total amounts of money you spent each month over the past year. That is a prety good start. Most people can't even tell you how much they spent last year in total. So you're already doing better than them.

The next step would be to pay closer attention to your credit card statements.As you go through your credit card statements, classify your expenditures under a few basic categories ex Groceries, Eating out, Entertainment, Transportation, Clothing, Everything else. These categories will add on or blend in with the ones you got from your bank statements.

Here's an example of what your spreadsheet would look like

And you're done. Now you have listed all your expenses over the past year, neatly categorized and separated by the month of the expense.

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