Managing your money

The basic principles of budgeting

The love of money is the root of all evil but money is an essential commodity in a modern economiy. It determines how well we function in obtaining the basic human needs of food, shelter and clothing as well as achieving the greater needs of self-improvement such as a good education, our overall well-being and the finer things of life.

So why is it that most of us never have enough money to even provide the basic needs? We work hard to earn our wages and yet at the end of the month we feverishly avoid the telephone calls from debt collectors and end up paying late charges on our credit cards, mortgage and/or rent. The marketplace we live in constantly bombards us with advertisements promising a multitude of products and gadgets that they say we need, with enticing payment plans, no interest for several years, and cash-back offers as well as those never ending sales and promotions.

How can we escape this madness? How can we navigate through the forest of commercialization, unharmed and financially sound, with our credit report score intact and have money in the bank to provide for a rainy day? Wouldn’t it be fantastic if we all had the ability to pay our bills and have money left over for the finer things in life? The answer lies in two basic principles: self discipline and creating a budgeting plan and sticking to it. Both principles work hand in hand; they are not mutually exclusive.

What is self-discipline?

It is the act of consistently doing the things that will create a desired outcome until it becomes the normal behavior pattern.

What is a budget?

Budgeting and planning means creating a list of all anticipated income minus all anticipated expenditures. The desired result is to have the net effect being zero or greater than zero.

Let’s explore what we would require as the desired outcome with respect to discipline. Perhaps the best way to consider this is to actually look at the consequences of not being disciplined when managing our hard-earned funds. Spending above and beyond our limited income causes several severe consequences:

Late charges on our credit card accounts. Did you know that late charges account for approximately 30% of credit card companies’ profits?
Unwanted harassment from collection companies.
Higher interest rate charges on mortgage loans due to a low credit score. This alone could cost you hundreds of dollars per month.
Declined loan applications from financial institutions.
Declined job applications. Many companies do background checks of credit histories as a part of the job application process.
Inability to provide the basic needs for your family due to decreased cash flow.
Finally, indiscipline can lead to unnecessary poverty and helplessness.
For every purchase you make, ask these questions in the context of the 7 listed negative consequences: do I need or want this item?; can I afford this item?; am I budgeting and planning for this item?

Unless it is an absolute emergency, you should avoid confusing wants and needs, especially if your intended purchase was never budgeted for. If these three questions become a part of your everyday purchase decision, then you will be well on your way to achieving financial discipline. Now that we have mastered the art of disciplining ourselves, then comes the next important step of creating a budget.

Setting up the budget

There are several factors that must be considered in creating a budget; they are:

A budget must be reasonable and reflect a true picture of your anticipated net income. Your net income is the amount you actually take home after taxes and any salary deductions such as health insurance, or other personal deductions.
It must be achievable and reflect a true picture of your most important fixed and variable expenses. Important fixed expenses are those payments that remain the same, month after month. Variable expenses may change month after month.
The difference between your anticipated income and anticipated expenses should always be zero or greater than zero.
Check up on your expenditure patterns by saving all receipts and bills for the next two These receipts can then be categorized into various types of expenditures and inserted into a sample budget to get a picture of your past expenditure habits and the impact on your zero budgeting approach.
The principle of paying yourself first is vital. This will ensure that you have started to develop equity in yourself. This must be done regardless of your income level or who you owe. Do not compromise on this issue as it’s your ticket to financial independence.
If item 5 causes your net income /expense to fall into a negative state then you must seek additional income (part time job /overtime if available)
It is always better to understate your anticipated income and overstate your anticipated expenses.
Any surplus funds from the difference between your anticipated income and anticipated expenses should always be used to pay down high interest rate credit cards or loans first before you add it to your savings.
If you use your credit card to pay any item that is included in the budget, that item should be removed from the budget for that month to avoid double counting as the cost would end up appearing in the monthly minimum payment for the credit card.
Managing unexpected important expenses

The most important thing to remember is that large, unexpected expenses should never interfere with your current budget. Use your credit card or seek a short-term loan to cover the expense and then set up the minimum payment or adjust your monthly credit card payment on your next month’s budget. In this way you are able to avoid major interruptions in your cash flow and will be able to satisfy all of your crucial bills. Be prepared to limit your credit card use only for emergencies or very important expenses that would otherwise limit your ability to function productively if those expenses were not paid.


A living, breathing budget

Finally always remember that a budget is an interactive document that you should look at daily or at the very least weekly; you must update your expenditures regularly in order to be able to determine if you are on track with your budget or if you need to take corrective action. This means that you must get into the habit of saving all your receipts and totaling them according to the categories in your budget before you discard them. This can be done very easily if you have your budget in a Microsoft Excel file. To achieve effective budgeting and planning you must practice financial discipline. The consequences of financial indiscipline can eventually lead to helplessness and poverty. Remember the three question rule: do I need or want this item?; can I afford this item?; did I budget for this item? These questions combined with creating a written, workable and achievable budget is the easiest way to effectively manage your money.

by K.B.E. Phillips 8.11.07