Advertising
Advertising

How to Keep Your Personal Budget Under Control

How to Keep Your Personal Budget Under Control

Waking up one day and realizing that you don’t have that much money left to use this month is surely nothing nice. I’ve had it happen a couple of times and it wasn’t pretty. It’s not that I don’t have any common sense; the core of the problem sits somewhere else—bad money management.

personal budget

    So how was I able to fix it, and how you can do the same? There are some steps that need to be taken, but before I can tell you what I mean let me explain what this post isn’t about: it’s not about how to make more money, it’s not about saying no to the nice things in life, and it’s not about starving. It is, however, about being aware of where most of your money goes, and about being conscious of your spending habits.

    Monitoring is the first step

    I’m sure you’re familiar with the saying that what gets measured gets improved. This is a rule that’s valid for your personal budget as well. If you want to keep things under control, you need to start by paying close attention to what you’re spending money on. Now, this isn’t the moment where you should restrain yourself from buying something you’d normally buy. It’s just about writing down your expenses and keeping them for later analysis. Keeping note of very expense sounds like a lot of work, but the 21st century comes to rescue.

    Advertising

    If you have an iPhone or an iPad (or an Android device) then you can use one of many personal financing apps that are available out there (image below).

    iPad-apps

      There are both free and paid solutions, such as:

      I didn’t have the chance to test them all out, so choosing the exact app you’re going to use is up to you. You can start by going to the App Store and searching for either “budget” or “personal finance”, but make sure that your app allows you to:

      Advertising

      • categorize your expenses
      • add expenses on specific dates
      • add your salary and any income you have
      • input all costs using your local currency
      • change the currency (optional, if you’re spending money in more than one currency)

      One month head start

      Unfortunately, you won’t be able to do everything overnight: you need to spend some time getting data and building your spending profile, so to speak. Usually one month is enough to gather a sufficient amount of data, but if your spending habits are a bit more unpredictable then you might need more time. During this initial month, make sure to set a habit of noting down every expense you make by putting it into your chosen app. Remember to use the right categories, as this will be the only way you’re going to able to analyze this data later on.

      Let me say this again: categorization is key to success here.

      For instance, you can divide your expenses into these categories: rent, food, going out, coffee, alcohol, bills, gas, entertainment, education, etc. This is also a good opportunity to input your salary and any other profits you’re making (e.g.: freelancing, securities, bonds, stocks).

      Review

      When the month is over, it’s time to review your expenses and take notice of all possible areas for improvement. As I said before, the key here is to look at categories of your expenses: some of these categories are completely mandatory, like rent, or your electricity bill, so you can’t do anything about them. Others are not mandatory, but they are part of your “joy of life,” so to speak, so you wouldn’t necessarily want to get rid of them. The rest, however, may prod you into making some conscious decisions and taking a different direction with your money.

      Advertising

      Start by looking at each category and deciding if you’re comfortable with the amount of money it costs you. If you’re not, then try to find cheaper alternatives or erase some expenses completely. For instance, one of the most interesting revelations for me was that I was spending an incredible amount of money on coffee. The first step I took was the decision to drink more coffee at home as opposed to going out—this one step cut my coffee expenses in half.

      This is just an example, but I’m sure you can see the potential that lies in this method. The more you categorize your expenses, the more areas of improvement you’ll be able to find. Again, this isn’t about lowering the quality of your life—it’s only about erasing stupid expenses and finding new and improved ways to experience as much joy in life and spending less money at the same time. Of course, if the amount of money you spend is more than the amount you earn, then you’re in a lot of trouble. Once you input your salary, every personal finance app will let you know about such a situation.

      When you have all your categories sorted, you can move to the next phase.

      Planning

      The final step is to plan your spending for the next month. Now, this isn’t about writing down what you can and cannot buy, but more about placing some simple guidelines in the back of your head. Things like: drink coffee at home, don’t buy more than three beers at a time, don’t use credit cards to buy cheap items, buy less clothing, and so on.

      Advertising

      If you manage to pay attention to such guidelines for the duration of the next month, you’ll surely be able to lower some of your expenses with no loss in your quality of life. Actually, being aware of our personal budgets is not that difficult once we realize one thing: the devil is in the details, and when it comes to personal finance, details = small expenses.

      Subconsciously, we all know this. If we’re planning to buy something big—and I mean massively big like some Fort Worth real estate or a new car—then it doesn’t actually affect our monthly budgets. I mean, we always have everything carefully planned out, and know how much we can afford to spend exactly, and how much the investment is going to cost us over the years. However, buying something small here and there doesn’t seem like it can hurt us, but when we add everything at the end of the month, we can see that all those small things have turned into one surprisingly big bill.

      Personal finance apps help us to notice this and then take the right action… as long as we remember to put every expense into the app. I strongly encourage you to give it a shot and check how much money you can save. For me, the change has been significant, to say the least.

      What’s your take on this? Have you faced any surprising problems when dealing with your daily expenses?

       

      More by this author

      Karol Krol

      Blogger, published author, and founder of a site that's all about delivering online business advice

      How to Plan Your Day for a Healthy And Productive Life How to Stop Information Overload and Get More Done How to Steep a Perfect Cup of Tea Every Single Time 10-Email-Management-Skills 10 Email Management Skills Everyone Should Learn to Be More Productive How Not to Fall Into a Productivity Hole

      Trending in Money

      1 How to Set Financial Goals and Actually Meet Them 2 25 Killer Sites For Free Online Education 3 10 Recession-Proof Debt Consolidation Tips 4 The Definitive Guide to Get out of Debt Fast (and Forever) 5 25 Easy Tips on How to Save Money Fast

      Read Next

      Advertising
      Advertising
      Advertising

      Last Updated on September 2, 2020

      How to Set Financial Goals and Actually Meet Them

      How to Set Financial Goals and Actually Meet Them

      Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

      In this article, we will explore ways to set financial goals and actually meet them with ease.

      4 Steps to Setting Financial Goals

      Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

      1. Be Clear About the Objectives

      Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

      It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

      Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

      2. Keep Goals Realistic

      It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

      It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

      3. Account for Inflation

      Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

      Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

      For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

      Advertising

      4. Short Term Vs Long Term

      Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

      As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

      By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

      How to Achieve Your Financial Goals

      Whenever we talk about chasing any financial goal, it is usually a two-step process:

      • Ensuring healthy savings
      • Making smart investments

      You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

      Ensuring Healthy Savings

      Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

      This is the focal point from where you start your journey of achieving financial goals.

      1. Track Expenses

      The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

      Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

      If you’re not sure where to start when tracking expenses, this article may be able to help.

      2. Pay Yourself First

      Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

      Advertising

      Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

      The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

      Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

      3. Make a Plan and Vow to Stick With It

      Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

      Nowadays, several money management apps can help you do this automatically.

      At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

      Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

      You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

      4. Make Savings a Habit and Not a Goal

      In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

      Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

      • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
      • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
      • If you go shopping, always look out for coupons and see where can you get the best deal.

      The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

      Advertising

      5. Talk About It

      Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

      Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

      6. Maintain a Journal

      For some people, writing helps a great deal in making sure that they achieve what they plan.

      If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

      When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

      Making Smart Investments

      Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

      1. Consult a Financial Advisor

      Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

      Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

      2. Choose Your Investment Instrument Wisely

      Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

      Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

      As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

      Advertising

      3. Compounding Is the Eighth Wonder

      Einstein once remarked about compounding:

      “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

      Use compound interest when setting financial goals

        Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

        Start saving early so that time is on your side to help you bear the fruits of compounding.

        4. Measure, Measure, Measure

        All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

        If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

        Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

        The Bottom Line

        Managing your extra money to achieve your short and long-term financial goals

        and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

        More Tips on Financial Goals

        Featured photo credit: Micheile Henderson via unsplash.com

        Reference

        Read Next