Exactly how to budget - by Cash Doctors

Budgeting isn't that hard really, it's more a matter of actually doing it.

Are you really going to do it though? People who smoke know they'll die sooner and they smoke anyway. They can't claim to be ignorant when there's a black lung staring at them every time they reach for a packet of cigarettes.

Its the same for overweight people. They know the difference between good and bad food, that they should eat less and actually exercise to lose weight. But they don't do it do they? Little by little they'll get fatter and fatter until they have diabetes or a heart attack one day. It just creeps up.

Basically in the short term, it's easier to do nothing than to take action. But when you add up lots of 'short terms' you get a long term and you get consequences. You have to think like this.

We all know what budgeting is. It's not that hard. You're on a fixed wage. You pay your fixed expenses then allocate some for debts and live off the rest and maybe even save some. That's it.

You might even save some and have enough to go on a holiday without borrowing or pay your car rego, that's great. The reality is that no matter how much we budget, things will pop up and throw the budget out which can easily trigger the debt cycle again if you have no savings.

Consider this:

You take a holiday or pay your car rego. You haven't save enough so you pay on credit card. You in tend to pay your credit card off to repay the holiday or rego, but at the end of the month there's always something more fun and exciting to spend the money on rather than repaying the credit card, so instead of paying the whole balance, you pay the minimum, or maybe even miss the payment. Does that sound familiar?

There's no fancy way of saying it. You have to do it, and the earlier you do it the better off you'll be financially. And you'll get a good feeling out of being well organized and managing your resources properly.

So how do you get started?

Firstly, set aside an hour or two. Turn on your PC and go into MS Excel or get some paper, and put down what you earn and what your fixed expenses are.

I'd work it out over a month, as bills are monthly and you might be paid monthly or fortnightly.

Then track what you spend for a month and determine whether you can pay your fixed expenses given what else you're spending your money on.

Generally you can say that 2/3 of your money should be on living expenses like food, housing, transport, clothing, while the other 1/3 should be split between entertainment and longer term saving or repaying debts.

2/3 = food, housing, transport, clothing

1/3 = entertainment and longer term saving or repaying debts

In the early days, you might have to pull your head in on the entertainment front and allocate most of that extra 1/3 to repaying debt. It's not sustainable to consider repaying debt by taking from the other 2/3 (living expenses). I.e. I'll eat baked beans for a year and ride a bicycle 30km to and from work and dress in curtains. Too many people make the mistake of cutting themselves too tight on living expenses, so the budget quickly gets too hard and gets canned. Don't kid yourself.

Take this example:

If Susan earns a net monthly pay of $2600, she might spend $600 on rent, $320 on fuel, $480 on food, $320 on bills, $320 on entertainment and clothes = $2040. That leaves $560 every month to repaying her credit card and the default she has to a mobile phone company so she can clean up her credit rating.

Net Monthly Pay = $2600

Budget

• $600 Rent
• $320 Fuel
• $480 Food
• $320 Bills
• $320 Entertainment and clothes
• $2040

leaves $560 to help pay credit card and baycorp default

If I were Susan, I'd take the amounts budgeted for fuel ($320), food ($480) and entertainment and clothes ($320) and transfer them into a separate bank account. The rest is strictly off limits for these purposes, and is only for rent ($600), bills ($320) and repaying debts ($560). If Susan spends less than she's allocated on fuel, food and entertainment and clothes, then it's up to her what she wants to do with it. Have a night out or transfer it back and use it to repay debts. A reward doesn't hurt sometimes. There's a plan.

Bank Account A

• $320 Fuel
• $480 Food
• $320 Entertainment and clothes
• $1120

Bank Account B

• $600 Rent
• $320 Bills
• $560 debt repayment (credit card and baycorp default)
• $1480

$1120 (Bank Account A) + $1480 (Bank Account B) = $2600 (Total Net Pay)

But she has to commit to it and do it. Or she's just wasting her time and waiting for someone else to come along and sort it out. And you know what? They won't. It's up to you.

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