February 5th of 2018
Fellow Steemians,
As stated in my last “letter”, finance wise, I was lost. No direction, no plan, no ROADMAP.
https://steemit.com/money/@martusamak/financial-life-of-a-common-man-letter-1-the-wake-up-call
The time for a financially oriented set of decisions had to be taken urgently.
Even the greatest journeys start with a first small step.
Bear with me as I try to explain to you the basics of designing such a PLAN.
After some research I came to the term “Budget”. With no technical definitions needed, at least not for now, a budget is like a ROADMAP for your personal finances. And the better part is that its you to decide the direction you are going, your checkpoints, the possible alternative paths, and to change it all, with conscience made decisions. The end goal is to take control over your money, not as an end in it self, but as a mean to keep going in this “endless” journey.
...
First things first,
In a quick look at the online version of the Cambridge Dictionary, budget is defined as:
- “a plan to show how much money a person or organization will earn and how much they will need or be able to spend”;
- “the amount of money you have available to spend”;
Let’s focus on the first one. A budget is a representation, usually a spread sheet but not necessarily, of your total income - the money that you earn, that comes in - and the total of your expenses - the money that you spend; that goes out.
Easy for now, right?
Now let’s add to that a third well known concept: TIME. You have to decide the time span of that budget. Would it be a monthly budget, for instance, if you earn a monthly wage. The time span of a budget doesn’t have to be related ONLY to your paycheck to paycheck period. Usually the Budget comprehends a the duration of a month with all it’s income and expense transactions.
There’s another thing about budgeting and its relation with time. Since you are planning you are taking decisions AHEAD of the moment that they’ll actually happen.
“And so what?” You might ask...
Well, You’ve just started to be PROACTIVE rather than reactive about your financial situation.
So a budget just happens to be a PROACTIVE approach to personal finance management. Call it your “financial freedom plan” if you want, because it will actually be it. Does that mean you’ll go out and be spending with no rules nor discipline? Nope! The great difference is that it is YOU who is MAKING the RULES. Not your mom, dad, brother, sister, wife, husband, rich uncle, the advertisement campaigns or the government.
YOUR MONEY, YOUR RULES.
Don’t forget about them, though... ;D
The ROADMAP to FINANCIAL FREEDOM
So, you want to setup a BUDGET? First you should be aware if your total INCOME and EXPENSES for this month (if you are planing for the period of a month, which will be the case of the example used here).
The income part is easy, mostly because we know how much you earn and probably because you have just one or tow sources of income. The expense part is quite harder right? There are expenses on “monthly” basis that you haven’t even thought of.
That’s where the BUDGETING TOOLS start coming handy. You could use a simple pen and note book - just make sure you don’t loose it - a spreadsheet, which, correctly configured, it will make some calculations for you - or you could go with the overwhelming number of budgeting apps, be it for windows, android, iOS or webapps. I’ll be covering some of these in a “best of” like list on the next letter. I personally use YNAB 4. But for now, we’ll keep with a simple table like this one:
| Income | Value |
|---|---|
| Salary | |
| Gifts | |
| Other | |
| Total: | |
| --------------------------- | |
| Monthly Expenses | Value |
| ------------------------------- | -------- |
| Rent/Mortgage | |
| Electricity | |
| Water | |
| Gas | |
| Groceries | |
| Telephone | |
| Internet | |
| Gym | |
| Total: | |
| ------------------------------ | |
| True Expenses | Value |
| ------------------------------ | |
| Car Insurance | |
| Car Maintenace | |
| Transportation | |
| Health Insurance | |
| Clothing | |
| Birthdays | |
| Softweare Subscriptions | |
| Total: | |
| ---------------------------- | -------------- |
| Daily Expenses | Value |
| ---------------------------- | -------------- |
| Pocket Money | |
| Restaurants | |
| Drinks | |
| Total: | |
| ---------------------------- | --------------- |
| Goals | Value |
| --------------------------- | ---------------- |
| Emergency Fund | |
| Retirement Fund | |
| New Laptop | |
| New Car | |
| Gadgets | |
| Vacation | |
| Total: | |
| --------------------------- | ---------------- |
Somethings to pay attention to:
- On the expense part, you have major categories like “Monthly bills”, “True Expenses”, “Daily expenses” and “Goals”, that then divide themselves in subcategories such as “Electricity”, “water” or “Rent” in the particular case of monthly bills.
- It’s important to have the “Total” of the expenses for each “Major Category” so you can visualize how much of each one weights on your monthly budget.
Be aware that the CATEGORIES are up to you to decide. We all have different types of expenses. Different types of hobbies, needs, goals and financial situations. The point here is to comprehend that you have two types of TRANSACTIONS: IN(come) and OUT(expenses). And then you have to consider the frequency of these transactions: some will repeat on a MONTHLY BASIS, like the rent or the electricity bill, which you know or can predict with some precision the value of those bills; then you have things like groceries or fuel or transportation which more closely depend on your spending habits but you still can estimate a predetermined monthly amount (I will be covering SPENDING HABITS and FINANCIAL DISCIPLINE soon ;D).
You might have noticed the “TRUE EXPENSES” major category and it’s subcategories, right? Here you should include all those categories that:
- Repeat in a time span superior to a month and correspond so fixed amounts that you can easily predict ant that could include car and health insurance, or monthly subscriptions;
- Don’t have a specific due date or you can’t predict the amount needed to cover them, but you can estimate it, and so you can be prepared for those “rainy days”;
These last ones would include “birthdays and Christmas gifts”, “clothing”, a new laptop because yours could break, and so you are prepared.
Be aware that this is one of the most important points of budgeting, now you’ll be getting prepared for those months when something unpredictable happens or something clearly predictable that you just forgot...
You also are able to calculate the sum of each major category so you start to be aware of how much you THINK you spend, and on what.
Beginner’s Recommendations
When preparing for your new “Financial Freedom Plan” AKA You Personal Budget, bear in mind some of these simple advises:
- Make it personal. This is your own budget with your own rules in your own life. Do not copy-paste other’s people personal budgets. Not because of the author rights, but because, as its personal, it may not work for you. “No tow budgets look the same”
- Be realistic. I mean, really, just that amount for your pocket money subcategory? We both know you spend much more than that. If you are into cutting on some expenses and adhering to financial discipline,please, take baby steps. Small but consistent changes lead to big results.
- Be conservative. It’s alright to predict how much you can save in the next 6, 9 or 12 months if you keep that unrealistic budget that you first designed with an extremely aggressive saving mentality. Its really motivating, I know. But it will probably fail, so no predictions. If you want to “see the future” visualize your GOALS and keep track of your ROUTINES to reach them.
That's it for now. On my next post I'll be talking about my own budget, so things will get a bit more "personal" ;)
‘Till next week.
Yours truly,
A Common Man