If there is one thing that most people struggle to do, it’s making a budget and sticking to it. While preparing a budget is an achievement by itself, implementing it and sticking to it over the long term is a different issue altogether. Many people lack the requisite discipline of enforcing a budget. This, in turn, more often than not, lands them into debt territory.
To avoid financial troubles and the risk of being unable to pay your bills, it’s important to make a budget and adhere to it. There are a number of things you need to do to make sure your budget is enforceable.
1. Establish Exactly How Much You Spend Each Month
Preparing a budget that does not include all expenses is setting yourself up for failure. No matter how minor an item looks, if it has an expense attached to it, include it in the budget. Be as exhaustive and as accurate as possible when drafting your monthly budget.
Those small expenses add up.
2. Budget within Your Income
To ensure you can adhere to your budget, it should be measured against your monthly income. And by income here we are referring to after-tax income. This is because, if your expenses are more than your income, sooner or later, you will be in the red.
Budget within the boundaries of your income and don’t venture out. In addition, only budget for regular income as this is the only way you can budget with certainty. Irregular income cannot be relied on for the simple fact that it’s unpredictable and unreliable.
3. Determine Your Savings and Debt Payoff Goals
The irregular income discussed above could be channeled into paying off your loans or added to your savings account. However, your budget should also include a line for savings and debt reduction. Ensuring that monthly loan repayments are made on time will save you from punitive fees and higher interest rates. Loan interest that has suddenly spiked due to late payments or defaults will adversely affect your budget.
4. Track Your Expenses
Every expense should be accounted for. Create a tracking system for your expenses to keep your spending from spiralling out of control. In fact, before the budget-making exercise begins, you should track your expenses for at least three months. This will give you a clear picture of what your monthly expenses look like.
Tracking helps you remain accountable. Should there be leaks in your budget, tracking will help you identify them. Are you spending too much on take-out food? Your budget will let you know. You can then seal them off as quickly as possible before the entire budget bursts.
5. Evaluate and Revise as Necessary
Now that you know where your money is going and you have sealed the potential leaks, you should aim to keep your spending at under 90% of your income. The balance should go into savings and debt relief. You can also prune your budget to increase your savings by cutting down on non-core expenses, such as sports tickets or Starbucks coffees. However, no matter what you do, there will be times when your budget will require revising, either upwards or downwards. This is because nothing in life is static and neither are budgets.
Making a financial budget and sticking to it requires discipline. The three words that should be useful for this exercise are track, trim, and train. We have already seen why it’s important to track and to trim (prune) non-core expenses. Beyond this, we have to subject ourselves to ongoing training on fiscal discipline and investments. This is because, beyond budgeting, we need to look for ways to expand our income bases. This will come through a thorough understanding of available investment options and how to keep expenses under control.