The first step in wise money management is to have a budget, or spending
plan, in place. This doesn't have to be a complex document, but simply a plan to guide your spending so that your
money does for you what you really want it to. The process can be broken down into five general steps:
1. Goal Setting
Goal setting is similar to setting a vacation destination: without
some idea of where you're going, you will probably end up somewhere you don't want to be! By setting goals, you provide
the purpose which drives the rest of the budgeting process, and that makes it easier to stay on track when temptations
Financial goals are usually grouped into short term (less than one
year), medium term (one to ten years) and long term (beyond ten years), and can be characterized as follows:
Specific (dollar amounts, dates)
Measurable (you can tell if success has been achieved)
Achievable (reasonable, based on your income)
Relevant (makes sense based on your lifestyle)
Tentative (flexible enough to be changed if necessary)
Goal setting in a family environment always requires some compromise,
but communicating about different interests and priorities is an important aspect of having a healthy relationship
around the issue of money.
Don't try working toward too many things at once - perhaps start with
just one goal in each category and add others over time. Good luck!
Short Term Goals (less than 1 year)
Medium Term Goals (1 to 10 years)
Long Term Goals (beyond 10 years)
By determining what income you have to work with each month, you can
then decide how to allocate it between paying regular expenses, reducing debts (if any) and saving for your goals.
You might have income from one or more sources, and it might be steady
from month to month or quite variable. By using only regular sources of income and excluding things like overtime
or bonuses, you can be safer in your projections. Also, if your income is variable, using a month with lower income
will ensure that you don't budget too much into your available income. If a lower income month just won't work, consider
averaging your income over the last year, realizing that months with higher than average income will have to see additional
savings going to offset the lower than average months. Unpredictable income like bonuses could be used for special
extras, or as additional contributions to a savings plan.
3. Establishing a Spending Plan
The spending plan is that piece of paper where you list how you are
going to "spread your money around" during the month. This is best done by dividing the uses for your money into four
categories. The first three on this list should be considered essentials, while the fourth, as its name suggests,
is for optional expenses if there is enough money to go around:
a) savings for goals
b) fixed expenses
c) debt payments
d) discretionary expenses
By using a budget worksheet, you can work with the numbers so that
your income is spread over these categories in order of importance. Keep in mind that "needs vs. wants" is an important
concept at this stage of the game, as some wants will probably not be achievable at first.
4. Controlling Spending
After deciding how much can be allocated to each expense item, the
key to success is to monitor how your money is being spent so that the expenditures don't exceed the budgeted amount.
This requires a tracking system in which all expenditures are recorded, no matter how large or small. A notebook in
your pocket or purse works well for this, and again the system need not be complicated.
Simply keeping track of money as it is spent, then comparing the amount
spent to the amount budgeted on a regular basis, (ie. weekly) will ensure that your spending is on track. If you notice
that two weeks into the month you have spent three weeks' worth on a particular item (like gas or groceries), it is
time to take a second look before the next week passes.
Some expenses will not be incurred at all during a given month, like
gifts, car repairs or insurance premiums. As the annual amount has already been worked into the budget, it is best
to just leave this money aside in the bank, perhaps in a separate savings account, because you can be sure it will
be needed at some point.
5. Evaluating Progress
It is useful to sit down regularly and ask "How are we doing?" with
respect to the budgeting process. Perhaps you will find it easy from start, perhaps it will take some practice. By
keeping a positive attitude and looking for ways to improve your budgeting and record-keeping from month to month,
over time you can be sure that your money will do more of what you want it to do and less of what other people (like
advertisers and retailers) want it to do.
Download Credit Counselling Thames Valley’s Monthly Budget Form.