Saturday, May 2, 2009

The evil B word - Budget!!!!

You all know you should have one. You all know that without one you will continue to be a slave to your job, a slave to your bank, and a slave to your mum. You all know you like KFC.

Let's face it, you need to create a workable budget that will allow you to buy KFC whenever you want, but probably even more pertinently, allow you to afford the gym membership to then work off the extra flabby bits as a result of the aforementioned chicken feast. 

Until I was 27, I never had a set budget. I just spent as I needed and if cash ran out, I would stop spending. Let's call this Budgeting101: Living by your means. At it's simplest form, this is indeed budgeting, but it's a crap way to live and as time goes on, this creates a stalemate; a continuous cycle when all of a sudden you start asking yourself (possibly as you're standing in front of the KFC counter), where the hell did my money go???    

So a budget strategy is in order.

Budgeting201:Thinking about your money
Second year budgeting involves starting to watch where your money goes. It DOES NOT necessarily mean you have created a budget, but it does mean you are starting to become aware of where you spend your dosh and why you have nothing just before you receive your next pay cheque. 

This inadvertently leads to "but I'm spending it on things I need and want, I can't change, I can't stop eating KFC!!!"  I hear it from people again and again, that their bills and food expenditure, as well as other parts of their lives that require cash are the bare minimum they HAVE to spend. But it's a load of bullshit. It is the same people I see down the pub, driving huge petrol guzzling cars and always wearing different clothes. They're the people I see buying the latest mobiles, spending money on take away and having a Telstra phone account. They are the same people...you get the idea. I was one of these people a while ago.

It is important to note though that those students taking Budgeting201 are at least considering their financial state and I would hope that at a minimum, the population is at least at this stage of budgeting. 

Budgeting301: The invention of paper

Entering Budgeting301, third year budgeting is where it all begins. Those that itemise and write down some sort of a budget are at this level and it is the first step to realising what your money is ACTUALLY doing. You may recognise a few things at this stage:

- You eat way too much KFC.
- You have way too much fun. This isn't a bad thing, until all of a sudden you want to retire or stop working.
- Most of your money goes on petrol and car costs.
- You live to the end of your income.

And it is this last point that really should be looked at. Why is it that you run out of money at the end of your pay period and are left with nothing?

I was in this position a few years ago, even though I had no mortgage to pay, or any real outlays. But when I dug deep down to the underbelly of what was going on, it soon became very apparent that there were many many costs out of control. For example, I had a mobile phone that was supposed to be at $29.90/month, and was costing me $50-$60. I was eating (WAS) take away almost on a  daily basis...cost.....$20/day!!! I was renting....giving my money to someone else to help them pay off their mortgage. Pretty quickly it became apparent I was going to have to make a real budget. And so began the arduous journey that has taken so far 3 years to perfect and still has a way to go...

Budgeting401: Creating a cash flow chart.   

This is where I am at the moment I believe. As you can see in the table, this is a VERY SIMPLE way of doing a budget. My mate does something similar with Excel, and of course there are heaps of software out there that can help make this look all pretty and give you deep analysis for further digging. This is a simple, one page view of where your money goes and shows how my cash flow is travelling. This table for example showed that indeed I had more cash available than I thought. I am very happy to be in this position, but some of you out there will have trouble just to be in a positive cash flow position = spending less money than you have coming in. Regardless, this is an Identification Tool. It's what you do with it after that really matters.

In my last post I discussed disposable income and how important it is to start having cash flow positive actions, it is now that this can be applied. If you tweak and play with your budget so that you have SOME cash left AND you are happy with your disposable income amount (the money you spend on other parts of your life such as down at the pub), then what is left can now be identified as a dollar amount that can be used. This may be $5, $100 or $1300/week, depending on your income streams and it is this amount that can work in your favour. The basic notion of making money stems from this small left over cash reserve. What can you do with this amount of cash that will change your financial position? Stay tuned for Budgeting501:Strategic Cash Flow Thinking (last year of study before Masters level)

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