Establishing Costs and Income
The first thing to do is to recognise that all spending is not equal:
that some monthly expenditure is more important than others. For example,
not paying your council tax for a few months could land you in jail.
The next thing to recognise is that some outgoings are fixed and others
are flexible. With this knowledge you can begin to tackle your flexible
monthly expenditure intelligently and make progressive steps to reduce
outgoings both immediately and over time.
Additionally, you also need to recognise that even fixed expenditure
may be reduced with the right approach.
The next thing to do is to list everything you spend money on over the
course of the year.
I have put together a budget planning sheet for the purpose of helping
you do this. You can download it by using this budget planning sheet
link, http://tips.cars-and-money.co.uk and clicking on budget sheet on
the right hand menu, or by going directly to the file
download.
You will see that the sheet is split into specific sections to provide
some guidance on how to breakdown the list. The sheet is also split into
columns for yearly, monthly and weekly expenditure so that it is easier
to group all like expenditure together even if you pay for it in different
ways.
The most critical items are towards the top of the list, i.e.:
- housing costs;
- rates and utilities;
- important household services;
- personal insurances.
With the critical items, the consequences of non payment can either
be very high and/or occur very quickly, e.g. loss of house, loss of electric,
water or gas supplies, imprisonment etc. It therefore makes sense to
attend to these bills first.
The next part of the list is critical in terms of day to day living,
but much more discretionary, i.e.:
- motoring expenses;
- food and housekeeping;
- miscellaneous goods and services;
- personal and leisure;
- sundries and emergencies.
This group includes some very fundamental items such as food; however,
how food is purchased can have a massive impact on monthly expenses.
For example, living on takeaways is obviously much more expensive than
shopping carefully in the local price leading supermarket.
While detailing the first section is usually fairly clear cut (just
check past bills), this section is fraught with difficulty as most of
it can be cash or lumped spending. That is, a figure of £150 charged
to a card from the local supermarket says nothing about what was purchased
on the final bill - who knows, it might have been £150 of beer and crisps
- it can be difficult to recall everything.
If it is just you in the household you have the relatively simple task
of being honest with yourself about this sort of expenditure so that
you can recognise how much is really being spent on what. If you have
a partner, or live in a family group, it can be much tougher. The key
word is of course honest. You will have to draw out the truth about what
is really being spent and who is doing it. If it is the two of you, you
may have to recognise there is a key culprit, or that you are both as
bad as each other.
In any event this section is a land of opportunity as far cost reduction
is concerned so spend time on it, get out past bank and card statements
and go through them line by line. If necessary walk through a typical
week, or have everyone involved keep an expenditure diary so that everything
is exposed.
The third section in the budget sheet is entitled 'credit card and other
debt': in other words unsecured debt. Unsecured this may be, but non
payment still has consequences in terms of your credit worthiness and
other debt collection measures - including the use of county court judgements
and even bailiffs. The only difference between this debt and many of
the more critical fixed costs outlined above is the time it takes for
the consequences to bite.
If you are having financial difficulties then the figures that should
go in this section are minimum payments only. You will need to stop using
all cards until the situation is resolved.
The last section on the budget sheet is for income. That is, income
after tax - employable cash.
Make sure all income is included. So, if you do have shares that earn
dividends, or bank accounts that earn interest, then these figures need
to be included as well as any salary income from yourself, your partner
or anyone else in the household that may contribute to the monthly bills.
With all costs and income identified, we are now in a position to look
at the overall picture and start developing a plan that will ultimately
become our budget.
With everything in place, there can only be three scenarios:
- Income exceeds outgoings
- Outgoings equal income
- Outgoings exceed income
If income is greater than outgoings then you can continue comfortably.
Cost reduction, budgeting and careful saving will pay dividends in terms
of loan reduction, early mortgage repayment, or even building up savings
and personal wealth.
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If income equals outgoings, then the situation is a borderline one and
action to reduce costs will need to be taken. However, it is unlikely
that savings cannot be made and there is a strong likelihood you have
caught things on time and can turn it around.
If outgoings exceed income, then this exercise has not come a minute
too soon and it is now time to grab the bull by the horns and turn the
situation around.
Planning the Budget
In the previous exercise, we have identified all costs and all income
and now have a clear picture of the current situation. Using this information,
the budget we set will, in effect, be an overview of how we live our
lives from this point on. There will be certain rules that we have to
stick with, but we will know that sticking to the rules will allow us
to achieve our future financial goals.
The next part of the process is a little more painful and certainly
more laborious than the last, but nevertheless must be done.
Begin with the easy stuff first. This is the middle section on the budget
sheet, i.e.:
- motoring expenses;
- food and housekeeping;
- miscellaneous goods and services;
- personal and leisure;
- sundries and emergencies.
There will be lots of low hanging fruit here (easy savings to be made).
For example, let's say your daily expenditure diary reveals that on
your commute to work you buy a newspaper at the railway station and a
coffee while you wait for the train. You buy lunch at the deli around
the corner, but go to the local pub for a sit down lunch and a drink
on a Friday. You have a drink with colleagues after work on average 2
nights a week and buy an evening paper to read on the train on the way
back from work. This is what this expenditure looks like over the week:
- Morning coffee: 1.50 x 5 = 7.50
- Morning paper: 0.60 x 5 = 3.00
- Lunch at the deli 2.50 x 4 = 10.00
- Bar lunch: 7.50 x 1 = 7.50
- After work drinks: 2.80 x 2 = 5.60
- Evening paper: 0.50 x 5 = 2.50
- Weekly total: 7.50 + 3 + 10 + 7.50 + 5.60 + 2.50 = £36.10
Look at this again. Every single item is discretionary, yet it will
cost you £144.40 in a 4 week month.
You may not be able to give everything up on the list, but taking a
flask of coffee to work with a packed lunch may be a start. Many newspapers
now offer yearly subscriptions that will cut the weekly bill by more
than half - if you still need to have a newspaper every morning and every
evening (do you?). The pub lunch could be dropped and the drinks with
the colleagues after work cut back to one drink one evening a week -
still sociable enough for most people.
In this example we might get back something like £130 per month. If
there are two of you doing it, it might be more like £260 per month.
You need to do this type of breakdown and cost reduction exercise on
each line item. Drop things like takeaways to a once a month treat and
(if you do not already) learn to cook and cut out ready meals and other
prepared food. You will not only save money, you will find you start
living healthier too.
Examine closely how you do your motoring. Could you mange with one car
instead of two? Could you get rid of the gas guzzling 4 x 4, which would
reduce insurance, maintenance, road tax and fuel bills - all at once?
Take a look at a company like Cash Drive (http://www.cash-drive.co.uk)
to see if you could buy a smaller car at a sensible rate.
Hopefully you are getting the idea by now.
Once the individual figures have been reviewed and cost reductions identified,
you can put the new figures into the budget sheet and we can now start
to see the new budget taking shape.
Next we can look at the first section. That is:
- housing costs;
- rates and utilities;
- important household services;
- personal insurances.
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