To B(udget) or not to B(udget), that is the question

I was talking with some friends last week about budgeting and why some people do and some people don’t manage to keep track of their finances on a weekly or monthly basis.

I was talking with some friends last week about budgeting and why some people do and some people don’t manage to keep track of their finances on a weekly or monthly basis.

For me, creating a budget or a spending plan as I like to call it, is so important because I believe every aspect of your finances revolve around it.

Everything you do and wish to achieve financially is impacted by how you manage your finances each month, so why don’t more people actively manage their money each month?

Maybe some people have enough money, maybe some don’t want to be reminded every month just how bad things are, or maybe people simply have no financial goals they want to achieve.

For me a budget is the act of deciding how much of my money I am going to spend on particular categories such as food, clothing, entertainment, my kids and so on each month. It isn’t just about having money, but figuring out what I have and what I am spending it on.

But the main reason I budget each month is because I have financial goals, I know exactly what I want to achieve, when I want to achieve it by and how much I am going to need.

Some people’s financial goals are to pay their bills on time, get a deposit for a house, become their own boss, buy a new car, help with their children’s future education, pay off debt etc. so managing your money on a monthly basis is about getting from where you are to where you want to be. It ain’t rocket science.

One of the reasons people often have trouble budgeting of even thinking about budgeting is because they haven’t really sat down and realistically thought about the kind of life they would like to have and how they might pay for it.

I met a couple some months back who were earning a very good monthly salary between them, but they didn’t track what they were spending their money on and always seemed to be in their overdraft every month.

They wanted a quick solution to this problem but didn’t want to sit down each week and record where their money was going. So, how on earth can I help them if they, not to mind me, have no idea where they are spending their money each month?

I gave them an exercise for one month to write down everything they spend their money on, even if they bought something for a euro, record everything and then come back to me.

Along with this I asked them to give some thought about what financial goals they would like to achieve because up until then they had none and as the saying goes “if you aim for nothing you will hit it every time” so I asked them to think about one goal they would like to achieve in the short and long term.

Fast forward one month and they are back in my office so I asked them how they got on?

They admitted that it was a pain in the ass writing down everything they spent their money on, but boy did it open their eyes as to what they were spending, and where they were spending it.

For example, they discovered that they spent €211 on coffees, €55 on papers and magazines, €178 on clothes (for themselves) €115 on take aways and eating out.

They discovered that they were paying €28 per month more on life cover than they needed to, discovered another life policy in existence they thought they had cancelled and also their house was over insured by €60,000, meaning they could save a further €12 each month by getting it insured for the right amount.

So, a great start. I then asked them had they given any further thought to what financial goals they would like to accomplish?

They said they had and the long term goal was to be in a position in the future that if and when their four-year-old daughter ever decides to go to college they would be able to pay for her fees, accommodation etc.

Their short term goal was to go on a holiday and be able to do so without having to go to their credit union for a loan to cover the cost of flights, accommodation and spending money, something they did most years because it was “the easy thing to do”.

This was great for me and them because we both now knew exactly what they were up against i.e. what they were spending their money on and most importantly we both knew what they would like to achieve which I was able to put some numbers on for them.

If they want to help their daughter with college fees, they need to start saving €221.50 each month. If they want to go on a debt-free holiday in two years’ time, and they want to go to a particular place in the UK, then they will need €2,750.

So great, now we have a figure for both goals they need to work towards and they know the importance of me asking them to (a) track their spending each month and (b) setting themselves objectives. Because they know that both go hand in hand, they are extricably linked.

Their success on achieving both goals depended on their ability to do two important things which were:

a) Prioritise

b) Compromise

They knew without me telling them that they were not going to be able to achieve both as they simply did not have the funds for both, so they needed to balance their long term goal against the short term one.

We decided to immediately set up a savings account for their UK holiday in 2015 and they were going to deposit €115 into it each month.

And guess what? They didn’t have to come up with new money, realising what they were spending their money on already, they decided to cut back on those take aways and coffees and redirect some of that money into their holiday fund.

And once that car loan they have finishes in 14 months’ time, rather than change the car, they are going to keep it and use that money they would have been paying on a loan towards their daughter’s education.

They admitted that although they thought they understood how much they spent in general and where they spent it, they were amazed at how much they spent on certain items.

And by creating a budget, they created awareness for themselves and I am happy to say remain committed to it five months later because you know why? They keep all of their financial goals as part of their central focus.

Figuring out their income and outgoings just reminds them and keeps them on track that their hard work is actually for something and I really hope more and more people would do the same.