This is the time of the year when Government, businesses and households do their Budgets. But what is the point of a Budget? It’s a way of planning and tracking what your income is versus where you are spending/investing it, and then becomes a tool to basically keep yourself accountable for achieving your planned outcomes. Doing a Budget is not that hard. Getting them to balance though can be. Bear with me, Budgets might not be as boring as you think!
Let’s face it, Budgets themselves really aren’t fun. Even spreadsheet lovers (using colours, sophisticated data entry, and formula’s to their hearts content) can only do so much to put lipstick on a pig. Which is why I thought we’d spice it up a bit with one of my favourite beverages, the BEER economy. After all, the secret to good budgeting is to remember the reward at the end: a nice craft beer to treat yourself, or you might just be stuck with packet mix home brew.
Budget to Build – start with the end in mind. Set yourself goals. But start with knowing your numbers. What does it cost to run your kingdom? A good rule of thumb is the 60-20-20 rule. 60% of your money will go towards “Need to have” expenses that you can’t do without. 20% should go towards Savings, which will help build your future Earnings income (giving a positive compounding effect). The 20% towards savings should go towards acquiring income producing assets. And the final 20% is there to Reward yourself, which includes all the Nice to Have.
Earnings – most people will have a fairly accurate picture of what their upcoming earnings are likely to look like. If you have unpredictable income streams, plan your Budget around the lower income expectation, as it’s much tougher to wind back spending (especially locked in recurring costs). To boost your earnings, think of opportunities for a “side hustle” or ways to make money out of a hobby or unutilised assets (like hiring things out through the share economy), because if you are getting paid for building up something you enjoy, it’s not work anyway.
Expense – does everyone really spend this much? Look also at what spending you have that is “keeping up with the Jones’s” – social media and peoples vanity has a lot to answer for in colouring people’s perceptions, as nobody actually buys smashed avo on toast for every breakfast (despite all the foodie photos you receive). Many do however buy take away coffee when there are plenty of cheaper DIY options available. And a flashy new BMW doesn’t get you there any faster (in fact financially it slows you down). The key with expenses is to know what you are spending money on, and to reduce the ones you can. It is normal that whenever people get a rise in income they spend more. 60% of your income is a good tide mark for living expenses (food, accommodation related, transportation etc).
The important thing is to know how much it actually costs you per pay cycle to live. Acknowledging to yourself what you actually spend money on and how much you spend is a very powerful game changer, as it allows you to take control and prioritise.
Reward – last but definitely not least, having a functioning Budget means putting about 20% of your money aside to treat yourself. Reward is largely discretionary spending, that is money you don’t need to spend, but that makes you feel good. Mix it up a bit between small rewards (like going to the movies or footy) up to big ones (like a nice holiday or “big boys toys”). It might also be “upgrading” your expenses, for instance eating out instead of cooking at home.
Common mistakes with Budgeting are confusing spending for investment. An expensive car will cost you money (depreciate and add to your ongoing spending commitments). An investment is something that will increase in value as well as provide an income stream.
Other errors include having a Champagne lifestyle on a Beer budget. Nobody can have everything, so prioritise the things that are important to you (not your peer group).
Set short and long term goals. Just like writing to do lists, checking off on regular milestones helps give a sense of achievement, and rekindles enthusiasm for the Budgeting task by celebrating the results.
Look back to check on progress. People overestimate what they can achieve in a short space of time, but underestimate what they can achieve over a period of time.
Create new habits. The act of budgeting and keeping tabs on your income and expenses will help guide what you do, and perhaps how you do it. What gets measured gets done as they say, so if you monitor what you spend, it’ll be easier to find where you can cut back and save.
The above process can of course be adapted for businesses or Governments, as the principals remain the same. Even if you are an L plate Treasurer with no economic qualifications, the basics laws of finance and economics still apply. Don’t spend money before you earn it, and always live within your means, putting some money aside for the inevitable upcoming rainy days. By all means splurge a bit on yourself, but never using borrowed money. Cheers!
Words from the wise
“Pay yourself First” – Robert Kiyosaki, on the importance of prioritising saving by putting money aside first, and thereby forcing spending restraint.
“The easiest dollar to save is the dollar you didn’t spend”.
“Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like” – Will Rogers.
As always, Onwards and Upwards!
Fred Carlsson
General Manager
