Budget – Part 1: About budgeting and why is it important

Financial Education is essential in everyone’s life. We will try to walk you through starting with the beginning. We believe that among the first things you can learn when trying to financially educate yourself makes the subject of this article.

Money – they can ruin families, marriages and can be a barrier in fulfilling one’s dream.

Money issues bring anxiety, disputes and a perpetual state of unhappiness.

We live in a society where it always seems that we don’t have enough, and adding this to the pay-check-to-pay-check way of living, it’s easily understandable why this way provides low chances of development and overcoming financially barriers.

Of course that things must not be this way! The biggest secret in having financial stability is: Spend less than you earn! A budget is a tool that will help you reach this.

It’s very common to hear around you statements like: “Budget on 2022 is X” and other similar statements which maybe not all of us understand.

Without getting too much into the technicalities, the word budget comes from the French word, budget.

The dictionary definition would be: the money that is available to a person or an organization and a plan of how it will be spent over a period of time.

Pretty straight forward if you ask us 🙂

In order to getting to spend less than you earn, you first need to have a good overview of where your money is going. It’s important that every earned income, to have a purpose and destination at the beginning of themonth.

A written budget is the first step, towards financial stability.

The keywords here are: Written, Monthly & Budget.

If you’ve never built a budget or never did it for your personal finances, the first step is to start keeping track of your expenses over a 3-6 months’ time-frame. This doesn’t mean that you should stop after this period. On the contrary, you should continue to do this indefinite. The longer the expense tracking history, the more accurate date they provide. When you prepare to set-up a budget, we need to understand where your money will go ( up to the last cent).

Congratulations if you reached this part. Probably you may ask yourself: Does it mean that I have to analyze all my income and expenses?

Short answer – Yes. Let me tell you why. It’s the only way through which you can get to know where your money goes. If you don’t keep track of the money you earn and on what they go, it’s very unlikely that you will know for sure where they’ve gone. It’s in the same time the first step you have to do: tracking income and expenses.

Keeping track of this matters will allow you to be more aware about the destination of your money and you could consider making small adjustments, based on the date that you take out of your budget. Maybe the first week you won’t notice how much you spent on coffee/ chocolate/ parking – 25 EUR, maybe the second week either, but at some point, you will notice that you spent 100 EUR a month for something what was not necessary or could have been easily avoided.

The next step is to create your own budget. We mean a monthly budget. Should you be able to do this for 12 months, you will be able to level-up and get to create a yearly budget next, with the data extracted from the first one.

You may wonder: How should I know which income and expenses will I have this month?

You can’t be 100% accurate, but here’s a tip: you can calculate your expenses and income based on previous month(s). There is no such thing as a prefect budget. It’s an ongoing process.

For example, if you spent last month 600 EUR for rent, it’s most likely that you will have the same expense this month. Most of the expenditures are recurrent and similar from one month to the other.

Next we will mention a list of possible expenditures. When something’s missing, feel free to add your own and adapt the categories based on your situation. Same is valid for the income.

Categorizing expenses and income

For the start, and to get some traction, we could split all spending into two main categories: Needs and Wants, where the Needs are those expenses that are absolutely necessary for survival and Wants are those expenses that have the purpose of providing value and/or pleasure.

Needs

– Living: mortgage or rent, taxes, insurances, utilities etc.
– Transport: car payment, gas, insurance, repair costs, parking, public transportation costs, etc.
– Clothing
– Health: insurance, medicine, life insurance, physiotherapy etc.

Wants:

– Entertainment: show tickets, dining out, etc.
– Holiday: plane tickets, accommodation, food, car rental, etc.
– Free time: Gym subscription, sports equipment etc.
– Personal: Books, hairdresser, gifts, gadgets etc.
– Subscriptions: phone, streaming services, newsletter – TCI PRO wink 😉
– Financial obligations: premiums, loans, investments etc.
– Others: anything that can’t fit any of the above categories.

We can look at the income based on the source:

– Salaries
– Interests & Dividends
– Other

The above classification is just an example, leaving it to anyone to modify it in order to adapt it to one’s needs.  

In the following table you will be able to visualize everything mentioned above. It’s just a basic template which you can use to start immediately. We recommend to start your own Excel based table, following the below template:

What comes out from the above example is that we did not spent all the money we earned. Thus we have a positive balance, meaning we have 7,33 EUR left.

It’s likely to happen that when you do this for the first time, to not be able to stay within the budget, meaning you will spend more than you earn. No need to panic. This is just the beginning, and soon you will be able to be better at it.

If you already used the above template and have a general overview, then it’s time to move to the next level and keep your budget in an Excel document. We advise you to check Dave Ramsey’s budgeting resources as you will find plenty of tips & tricks, tools and mechanisms that will help you improve your budgeting skills in no-time.

Furthermore, here’s a couple of tips for keeping the budget under control:

Boundaries

When it’s time to budget, do this by giving each money you earn a pre-defined destination. This must happen at the begging of the month (or just before receiving the income). By giving money a destination, you won’t have to worry about what you can or cannot buy, because the money that were not scheduled at the beginning of the month, cannot be spend mid-month.

Teamwork

The entire family, including kids, must take part in setting up the budget. This will ensure that all family members are on board. Once everyone is aware of the decisions, it will be much easier to get traction.

Adjustment

Don’t worry about slipping out of budget over the first few tries. It’s important to stay flexible and make adjustments. A good recommendation would be to that in the first 1-2 months of budgeting, to revise this on a daily/ weekly basis in order to understand if the set budget was too optimistic, or on the contrary, too tight. Don’t worry and don’t get discouraged – it’s all part of the process.

Safety

Of course that unexpected situations and expenses will occur, so it’s wise to be prepared and have a safety net for emergencies. As a start, you would need an emergency fund of at least 3 salaries. Later, it’s indicated to grow this to 6 and ideally you would keep this around 12 monthly salaries.

The emergency fund is to be used for repairing the car, paying a medical bill, in case of job loss, and not for holidays, clothes or other similar expenses. We think you got the point. The emergency fund will help you stay on track, even when the unexpected hits.

Closing word

With this exercise, we wish to make you more aware of where your money is going. Starting there, you will soon be able to make the necessary adjustments so that you get to spend less than you earn.

Learning what a budget is and how to create a basic one is just the beginning towards a better financial situation.

We are curious to hear from you. Let us know in the comments section:

– Do you know where your money is going?
– When have you first started to use a budget and what made you do it?

Have a great week all!

Authors: @andrewf12 & @ostanescu

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