The "Money Makeover" - Step 1: The Budget
The first thing we are going to cover with the makeover is the budget. The budget is what holds it all together and allows you to ensure you are doing the best with your money from month-to-month.
Why Draw Up a Budget?
Having a budget offers the following benefits:
- You know where your money is going, before it goes there.
- It allows you to project expenses for the next month and re-balance accordingly. Reducing the "heart attack" factor of some unexpected event.
- It gives you "the big picture" which can be scary at first (because it illuminates just how much you are spending on debt etc.) but also makes you feel better because it puts things into perspective, assuring you that YOU are in control.
- Having a budget provides a one-stop shop for accounting things, once set up, it is easy to maintain. Spreadsheet software makes this process even easier.
What Do I Need for a Budget?
I highly recommend using spreadsheet software like Microsoft Office or OpenOffice (free, very similar functionality to MS Office). Using software not only makes the maths easier, but makes it easier on the eye and easier to maintain/reproduce each month (we are going to create a new one each month).
Failing that, a pad and pen will do!
Following this, I will be talking about using a spreadsheet, if you are not using one, then simply write on paper and calculate in your head!
Setting Up Your Budget
OK, so open up a new spreadsheet and save it as "Budget". Section off areas of the sheet with the following headings:
- Recurring Credit Card Charges
- Personal Care
- Work Expenses
These categories are your own choice, but I found these a good place to start.
Now, start going through each category and list EVERYTHING that needs to go in there. And I mean EVERYTHING (this is very important). Be sure to include things like:
- Vacations. Yes, you should budget for vacation time. We are human and we need a break now and then. Even if it means you just get away for a weekend in a hotel or something. Budget for it.
- Clothing is always something people think they can do without.. Can you? "Sorry I am not wearing any pants today guys, no budget for it". Are you serious? Even if you put a small about away just in case you need new shoes or something.
- Recreational time be it going out for a few drinks, or a meal with the better half. Budget for it, this is equally as important as vacations.
- Odd bank charges and the like for example, overdraft facilities charge when you use them. Yes this figure will do down each month, but these pounds need to be accounted for.
- Recurring credit card charges (for things like magazine subscriptions, online services etc.) are often forgotten about since "that just comes off the minimum payment". Well, it DOESN'T. If you have a service (like GitHub or LoveFilm) that costs you per month, budget for it. The fact that it is coming off the credit card means you need to BUY it. Remember, WE DON'T BORROW.
- Christmas, birthdays and other events. How much do you spend at Christmas? How much do you average a year on birthdays? Take that figure and divide it by 12. Yes, we are budgeting for these events that always "surprise" us too.
Start Adding Some Structure
OK, so at this point, you should have listed EVERYTHING that costs you each month. At this point, my spreadsheet looked pretty messy and disorganised, so let's start tidying it up.
What we need to do is have the fixed payments on one side (such as rent and utilities), flexible payments (such as credit cards) in the middle and cuttable payments (such as groceries, personal care, clothing, recreation) on the other side.
These payments are things that are really very unlikely to change and there is not much we can do about them. These are things like rent, household utilities, recurring credit card charges. Sure, we may drop/reduce them, but this is a rare process.
These are payments that normally have some kind of minimum payment, but are open to some change. The obvious candidates for these are debt repayments such as credit cards and loans. Now, I know what you are thinking "my loan is fixed-rate". Sure, but what is wrong with you saving the cash to clear it off, putting it in a savings account, letting it drip out, while gaining the interest (thus softening the cost of the debt)? We will go into more detail on this later, just trust me, put your debts in here.
As well as debt, savings should also go in here since these can obviously be adjusted. However, I try to keep the savings in a seperate section since they are a positive action, and there is always an air of negativity around the cells that have the debt figures :)
I'd also recommend that you set up conditional formatting on your cells to highlight if you put the figures below the minimum required payment to make sure you don't under-budget for these items. This section will be getting revamped soon, but for now this is good practice.
These are payments for things like groceries, personal care, clothing, vacations and recreation. I know you are thinking: "WTF? I NEED to eat!". Well, of course you do, but the idea behind this section is that these are payments that are prime candidates for savings. I have literally slashed my grocery budget in half (no, I am not starving or malnourished either). I have also reduced by drinking/partying budget by about 75% and I still get plenty of chances to cut loose and have a good time.
This section is where you are likely to claw back as much as possible to assist in our makeover efforts and are very likely to change regularly, so it helps to keep them out of the way of the other figures.
Let's Start Adding Up and Getting Some Perspective
Right, now we have all the figures in, start adding subtotals for each category that you have created. Once done, you should have some nice "Total" rows on your data with some (often) large figures in. Now add another section to the sheet. In this section we want:
Total Income: (Enter your monthly take-home salary here).
Total Outgoings: Use the "Sum" function to add up all the totals of the individual categories.
Balance: Take the value of "Income" from "Outgoings". This is the killer figure.
Now, if you are anything like me, at this point you may be having a heart attack, on the verge of crying or scrawling your suicide note because there is a large negative difference between the two. Don't panic, this is just us highlighting the problem. If you are actually looking at a positive figure, great! (but keep reading because we can still do something to improve our situation).
We now have perspective, we now know (perhaps for the first time) where our money is actually going.
Let's Make It Work
Now, like I said, at this point my outgoings were more than my incoming salary. No wonder my debt has been mounting! But how do I get the figures to balance?
This is where the "cuttable payments" come in, these are your first port-of-call for stripping back. I will do some posts on tips to make some real savings here, but for now just work on the basis that something has to give. For me, I slashed my "going out and getting wasted" budget first. I knew I was spending far too much on alcohol (I do love my Jack Daniels!).
Keep slashing until you have a balance of zero. If you are comfortable cutting other things, then do so.
Why Zero Balance?
Put simply, if you have spare money, you should be focusing it on clearing debt. We need to get to the point were our money is our own once again.
If you managed to cut a bit more and get a positive balance. Funnel some cash into your "flexible payments", put it on a credit card and help reduce the payments next month.
Our priority here is to clear debt. I cannot repeat this enough. It is not about managing, it is about CLEARING DEBT.
Make sacrifices! Push the boat out!
Our First Months Budget
At this point, we should have a sheet with all our expected payments listed, with total figures for each, total figures for income, outgoings and a final balance figure which should be pretty damn close to zero if not exact (if not, it should be positive).
Be aware that in the first month you are likely to get a few bits wrong. I personally ended up slipping back a little in my overdraft a little because I forgot a few payments that were due. Don't panic, we are not going to suffer too much since we are likely better off than we were last month - now go back make sure you have your major debts covered so you don't get stung bad.
Now you have done this, write the current month at the top of the sheet (or next month if you are planning to start on payday as I did). Then create a copy of the sheet and put the following month at the top of that. That is going to be your projected budget.
As we start rolling with our budget, we are going to be maintaining the two. Our current month will be used for tracking expenses as they go out. The second (following) month's will be updated to adjust expected payments (for example, we may realise we shaved too much off our grocery budget etc.).
- Roll with using the budget for one month.
- Start getting used (it really does take time) to honoring the limits that you have imposed.
(And REALLY do this, don't think your overdraft is OK to be used, that's borrowing and WE DON'T BORROW)
- Keep crossing off the payments as they leave your account(s).
- Adjust the projected figures as necessary.
The budget is our first tool to helping us with our makeover, next we will cover our first milestone, the "Emergency Fund I".
Need help setting up a spreadsheet? Have the template for my spreadsheet! Yes, this is the exact sheet I use. No, it is not quite "perfect" yet, but it's always evolving! Obviously I have stripped some things out, and left some in - as always, if you have any questions - do ask!
NOTE: The template file on SkyDrive seems to not play nice with the SkyDrive viewer, but the file should be in Excel 2007 format (I created with OpenOffice). If you have any problems opening in either, let me know!