The first step toward financial wellbeing is budgeting. Budgeting is the cornerstone of personal finance because money is finite, so you need to make the best decisions with your money. Remember, you only get to spend it once.
What is a budget?
A budget is a mechanism to help you figure out when, how and on what to spend your money. Having a budget doesn’t mean your money will be sorted, it just means you have a plan so that you always know where your money is going rather than wondering where it went!
A budget has two components; the money coming in and the money going out.
It is the difference between either having financial distress or financial wellbeing.
What type of budget do you have?
In an ideal budget, the money coming in is higher than the money going out. This is known as a budget in surplus - in this scenario you have money left over after paying for everything and can redirect those extra funds towards reducing debt, saving or taking up any opportunities that come your way.
The next best outcome is a balanced budget, which is when the incomings and outgoings are the same. Under the conditions of a balanced budget, you don’t have excess money to save but you also aren’t going into debt.
The least desirable outcome is when more is going out than coming in. A budget in deficit inevitably creates debt as the money you spend, that you don’t have, needs to come from somewhere and that somewhere is usually debt. As the debt grows, it increases the deficit since the debt needs to be serviced (paid back, with interest).
Budgets that are persistently in deficit can cause longer-term problems - debts can begin to snowball making them harder to service and payoff. As a result, credit scores may be impacted and people may find new debt to be more expensive (e.g. at higher interest rates) as other lenders begin to view the borrower as increasingly high risk. As credit becomes more expensive to access, a situation can quickly go from bad to very bad.
How to get started?
The trick is to work your way through the process and be honest with yourself about what’s happening with your money. Give your money a job, make sure that you aren’t spending tomorrow’s money today and if possible, have less going out then coming in so that there’s some to spare.
There are a myriad of ways to get your budget sorted, so we want to show you a really low maintenance method.
Budget Decision Tree
A step by step decision tree helps you examine your income (money coming in) and expenses (money going out) and put a plan in place to balance them - or ideally have more income than expenses!
After all, getting your budget right means you become the boss of your cash - you can confidently spend knowing that you are following your own plan and prioritising your income in a way that most benefits you.
Further Reading:
- Top 10 Money Tips: Read on to discover how you can break bad spending habits and create new good money habits.
- Overdrafts: Take a deeper look at overdrafts; into their benefits and drawbacks, as well as their dangers.
