Debt Management, Budgeting and Financial Controls – Budget Planning

budget planning

In the previous exercise, we have identified all the costs and all the revenues and now we have a clear picture of the current situation. Using this information, the budget we set will, in effect, be a general description of how we will live our lives from now on. There will be certain rules that we will have to stick to, but we will know that sticking to the rules will allow us to achieve our future financial goals.

The next part of the process is a bit more painful and certainly more labor intensive than the last, but it still needs to be done. Start with the easy stuff first. This is the middle section of the budget sheet, that is:

– motoring expenses;

– food and cleaning;

– miscellaneous goods and services;

– personal and leisure;

– Miscellaneous and emergencies.

There will be plenty of fruit close at hand here (easy savings to be made).

For example, suppose your daily expense diary reveals that on your commute to work you buy a newspaper at the train station and a coffee while waiting for your train. You buy lunch at the deli around the corner, but go to the local pub to sit down for lunch and a drink on a Friday. He has a drink with his colleagues after work an average of 2 nights a week and buys an evening paper to read on the train home from work. Here’s what this spending looks like for the week:

Morning coffee: 1.50 x 5 = 7.50

Morning paper: 0.60 x 5 = 3.00

Lunch at the deli 2.50 x 4 = 10.00

Lunch at the bar: 7.50 x 1 = 7.50

Drinks after work: 2.80 x 2 = 5.60

Evening newspaper: 0.50 x 5 = 2.50

weekly total: 7.50 + 3 + 10 + 7.50 + 5.60 + 2.50 = €36.10

Watch this again. Each individual item is discretionary but will set you back £144.40 in a 4 week month.

You may not be able to give up everything on the list, but bringing a thermos of coffee to work with a packed lunch can be a start. Many newspapers now offer annual subscriptions that will cut your weekly bill by more than half, if you still need to have a paper every morning and every night (do you need one?). Pub lunch could be eliminated and drinks with colleagues after work reduced to one drink one night a week, which is still social enough for most people.

In this example, we could recover something like £130 per month. If there are two of you doing it, it could be more like £260 a month.

You need to perform this type of cost breakdown and cost cutting exercise on each line item. Cut things like takeout to once a month and (if you haven’t already) learn how to cook and cut prepared meals and other prepared foods. Not only will you save money, you’ll find you’ll also start living healthier.

Take a close look at how you do your motorsport. Could you eat with one car instead of two? Could you get rid of gas-guzzling 4x4s, reducing insurance, maintenance, road tax, and fuel bills all at once? I hope you’re getting the idea by now.

Once the individual figures have been reviewed and cost reductions identified, you can put the new figures on the budget sheet and now we can begin to see the new budget take shape.

Below we can see the first section. That’s it:

-housing costs;

-fees and utilities;

-important domestic services;

-personal insurance.

These are largely fixed costs, but there are opportunities here too. Housing costs such as rent or mortgages can be reduced. Mortgage offers can be changed to take advantage of new offers from lenders, or fixed-rate schemes assumed if interest rates look set to rise in the near future. The term of the loan may be extended or (if things are really tight) the payments may be reduced to interest only for a while. You have to ask the question.

If you’re renting, could you get by with a smaller property or one in a less posh area? Could you get closer to work at the same time and reduce commute costs?

Take a look at what seem like fixed costs, like home or personal insurance, and compare rates and benefits. The offers in this area change literally every week.

Gas and electricity costs can be reduced by changing suppliers or, better yet, turning down the heat and turning off lights and appliances when they’re not in use. Focus on this for a while and you might be pleasantly surprised at what a difference it will make.

And so.

The last section of costs is credit card and unsecured debt. Like insurance, this may be a more flexible area than you think. If your credit rating is good, then you have plenty of room here to accept new cards and offers with 0% interest rates. When you do this, make sure to close the accounts you are transferring from. That is, it does not increase your overall indebtedness or the availability of debt.

If your credit rating is already low or bad, this may not be an option for you, so you’ll need to find other ways to lower your payments. One thing creditors like to see is that their debtors are in control of the situation. A well-crafted budget sheet like the one we are in the process of outlining here can go a long way.

Using the budget sheet, you can identify all the income and expenses that need to be incurred before you handle your unsecured debt. This will leave you with a fixed amount that can be used to negotiate reduced payments to your creditors.

This is a separate topic in its own right, but showing that you are in control of your own finances may allow you to negotiate a reduced payment plan with the companies in question.

Anything else you can do in this area to consolidate debt and lower interest payments in general should be closely scrutinized.

However, you should resist the temptation to undertake loan consolidations that involve the use of your property as collateral. There is probably another way, so explore the other ways first.

The last section is income. You may have been hard on yourself in the cost section, but the other dimension of budgeting is, of course, revenue. The more you increase your income, the less you have to cut back (or the higher the benefit if you do).

While writing ‘increase your income’ is very easy for me, it is actually much more difficult to do. However, there may be opportunities you hadn’t considered that would be worth exploring, such as overtime, weekend shifts, unsociable shifts, additional responsibilities you could take on, or even a second job. Changing jobs could also be an option, as could starting an entirely new career.

In other words, increasing revenue isn’t always about moving further up the greasy pole, sometimes it’s about side stepping into any area you hadn’t considered before.

One last point about income: As long as you have the budget sheet in front of you, it’s worth evaluating the cost of the job. In other words, when you add up travel, parking, fuel, dry cleaning, childcare, work clothes, etc. and then subtract it from your income, that will give you an actual figure of what you earn.

Finalization of the budget

This represents a substantial investment in time and effort. The end result will be an accurate, personally optimized budget sheet that puts you in control of your own finances.

Having made this effort, you should now have identified specific allocations for each item and now you need to ensure that money is allocated each month to cover those items, whether it is weekly, monthly, quarterly or yearly.

It’s unlikely you’ll be able to cut all your costs, move houses, change jobs, etc. all at once, so you may have already recognized that this budgeting exercise can be a progressive thing that happens over time.

So, to begin with, you’ll need to make sure your costs are under control and, at a minimum, your expenses equal your revenue. Over time, you’ll look for cost-saving and revenue-increasing opportunities, and once you take advantage of them, you can review the budget sheet, enter the new numbers, and move on.

One completely free benefit of all this is that once everything is complete and you stick with it, you can sleep through the night whenever you want.

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