How do I go about structuring a budget?
Here are the tools to help you on your way, writes Frank Conway
JANUARY is a big month to think about the year ahead for lots of people. Money is no exception. With a blizzard of bills coming minds get focused as budgets get strained.
This is generally the major motivating factor behind a determined push to have better control over personal finances in the year ahead.
Managing money is a lot like preparing for a marathon, you must prepare and remain committed.
It's a long-term process, you need tools. You need facts and you need consistency. And if any of the key aspects are missing you are unlikely to be successful.
A question people often ask is what information should be included to make personal budgeting a success. The simple and only answer is: everything!
For the majority of people, their money is a finite resource so it is extremely important they have visibility if they are to have control.
In order to map out a relatively simple but effective long-term budgeting strategy, a personal budgeting manager is needed.
Don't worry, this is not some external financial guru that is going to cost you an arm and a leg. Instead, it is a simple sheet of paper on which you list out your income and spending in sequential order.
Sometimes this is called an income and expenses document but that sounds like a phrase from the bowels of an accountancy firm.
Let's keep it simple and call it a budget planner.
A free, downloadable personal budget planner is available to Irish Independent readers on the Irish Financial Review website (www.irishfinancialreview.com/ budgeting).
The granular detail
Before you begin to use the planner, you need to do some legwork.
Again, using the marathon analogy, think of this as the pre-run stretching routine. In personal budgeting, receipts are those key documents that provide a wealth of information.
If you don't do so currently, you must begin by getting a receipt for every item you spend money on. Demand one if the retailer doesn't automatically offer one.
Keep receipts in a set place; an envelope is usually the best and then, once per month, add up all of your spending using those receipts as your guide.
One important point here. Sometimes people say that they have a "good idea" of how they spend their money even without receipts. Nonsense.
Lots of people deny how and where they spend their money until they see it in detail, granular detail, on a month-by-month basis over time. Memory cannot do this. Information can be backed up with evidence from receipts.
The other essential documents
Aside from receipts, the other key information sources include your current account statement(s), debit and credit card statements and last but not least, your income statements (payslips or P60).
If you are self-employed, use the Revenue information you submit and documents and relevant supporting material.
You are on your way
Now you are ready to begin budgeting. Use the personal budget planner as your guide.
Use your income statements (payslips) and populate the earnings section of the personal budget planner.
Work with your net income figures, the money you actually take home which should also be located on your current account statement.
If you have additional income sources, be sure to include this also.
Repeat this exercise for the spending sections of the planner until you have accounted for every cent.
Your final task is to add everything up. Here, you will have reached the moment of truth. What's your colour? Red or black? Spender or saver?
Repeat this exercise every month, within three months, I guarantee you will have a new appreciation for your money.
Properly executed, this exercise will accomplish two things.
First, it will inform you about your money habits and the journey it takes every month from being yours to becoming someone else's.
Second, the exercise will give you important detail about what exactly you are spending your money on.
For example, if you smoke, this exercise will inform you exactly how much you actually spend on buying cigarettes.
Sometimes, this single piece of information can serve as a motivation to reduce spending.
This applies across all spending areas including utilities, car fuel, groceries and insurance.
All are areas where simple market comparison can deliver more competitive value.
- Frank Conway is the co-author of ' Cents & Sensibility, A Financial Guide for Young Adults'. He co-founded Centsense.ie, a financial literacy programme developed for secondary schools and is the founder of the Irish Financial Review, a personal finance website (www.irishfinancialreview.com).