Gaining Control Of Your Finances Part Two

Posted on August 26 · Comments

In part 1 I talked about the mindset needed to turn your finances around, breaking spending habits and evaluating your current situation. Today we’ll look at creating a budget and making some spending changes.

4. Taking Control – Building A Budget

A personal budget shows how much money is flowing in and from where, and how much money is flowing out. It shows what exactly we’re spending our money on and reveals any expenses where we can make savings. A good budget sets out a target based on your financial goals, against which you compare your actual spending.

Is a budget really necessary? I know that many people are against budgeting for various reasons. I believe that the information gleaned from a budget about your spending habits is a powerful tool to making changes. Without knowing what you’re spending money on, it’s hard to know where you are able to cut back.

I’m still being surprised by the information gained from doing our budget. For the first time this year, we track expenditure on specific grocery items. I was astonished that after meat and vegetables, bread was the highest expense. Without tracking this information we would never have known this and the knowledge has empowered us to makes some changes. I now bake some of our bread and we buy bread at the end of the day when it is reduced to clear. We have now halved our bread expense and saved about $10 a month on the groceries.

Cliche I know, but budgeting is knowledge and knowledge is power.

A successful budget is one that is used often. It’s not something you do at New Year, only to forget about it, rather a budget is something that comes out nearly everyday as you record your expenditure for the day and compare that expenditure to your budget. It sounds like a lot of work, but as with anything, it becomes a habit, like brushing your teeth, and if you update it often, it can take less than 2 minutes a day.

To create a budget, look at your income and expenses for each month and write it down (as per yesterday). For an understanding on creating a budget, I’ve written about it here. Start by having your budget as accurate a reflection of your current spending patterns as possible and then look at places that you think you can cut down. Adjust the figures to reflect your ideal or projected budget – the one that you need to stick to in order to reach your financial goals.

When you have your budget, then you will want to compare your actual spending against your budget and track your success at meeting your financial goals. By doing this, it will give you the information you need on areas of your spending that are impeding you reaching your financial goals.

5. Making Changes – Cutting expenses one at a time

Once your budget is complete, have a look at each expense in turn and see how you can cut down. Choose one expense / spending habit at a time and focus on reducing that expense before moving on to the next one. Sometimes cutting expenses means changing old habits and spending patterns and replacing them with new ones. Once the new habit is formed then saving becomes automatic and easy. It might take some time changing habits so don’t try too much at once if you feel it will be counterproductive.

The best place to start is with discretionary spending. If you eat out a lot, or buy a lot of coffees, or purchase a lot of “stuff” this is the obvious place to cut down. That doesn’t mean you have to go without entirely, but once you have your budget in front of you, you will be able to see straight away areas that can be adjusted. Lattes add up? Friday night drinks reaching into the hundreds? Unused gym membership adding up each month? Pick an expense / habit each week to change and watch the savings add up.

Groceries are the third highest expense after housing and car payments, and it is also an area of spending with the most flexibility, after discretionary spending. The easiest way to save money on the groceries without changing your eating habits is to examine each item that you buy and get the cheapest option available. Of course there are many other ways that you can save on the groceries (see upcoming eBook – shameless plug )

There are two ways to save on the utilities such as the electricity, the phone, water, internet etc. The first is to cut back. Turn out the lights, use the TV less, hang the washing instead of use the dryer, email instead of phone, collect water for the garden. Again a lot of this comes down to being conscious and forming habits. Making it a habit to remember to turn the light off when you leave the room, for example. The results of your efforts aren’t immediately apparent, but you’ll notice the difference once the next bill comes in. These are actions that you can take everyday, that will impact your finances.

The other way to save on utilities is to shop around and compare prices. Your usage will affect which provider can offer the best deal.

Comparison shopping is also a good way to save on insurance. When making comparisons between providers, make sure you’re comparing apples with apples. Compare excesses, what is covered and what is not covered, and any extra costs that may be involved in covering items that are not part of the standard policy. While you can comparison shop and save on insurance at any time it ca be best to do so as a matter of course at the policy renewal date. Cancelling a policy before this time can cost you extra fees.

Have a look at debts like credit cards, personal loans and mortgages. Do some research and seek professional advice. Is it time to refinance? Is it in your best interest to consolidate your debts? Again shopping around can save you both immediately and in the future.

If you’re in the market for significant purchases like a car, home, furniture or appliances, this is where big savings can be made. Shop around, wait for sales and consider the running costs as part of the purchase cost. An energy efficient washing machine, for example, may be more expensive up front, but turn out less expensive over its lifetime than a cheaper model. Try to save as much as you can towards the purchase of large items as the cost of debt can add significantly to the overall cost.

These purchases are generally one off, infrequent purchases. While it’s wise to get a bargain and save money, you will have more opportunity to save small amounts on everyday expenses so don’t overlook or downplay the small everyday savings as these will add up quickly and can be more significant than the big savings.

6. Snowball – A plan to dust debt

The other part of gaining control of your finances is dealing with debt.

There is a lot of negativity about debt by frugal writers and generally in the so called “current financial climate”, so I wanted to share my perspective on debt. I’m not against debt. It can be a very useful financial tool. Let’s face it, how many of us would ever own our own home without a mortgage? On the other hand, debt can be crippling.

People talk about ‘good debt’ and ‘bad debt’, I’m inclined to think in terms of wise debt and unwise debt. Most of our debt is unwise debt: debt for consumer goods we don’t need. At some point we stopped being humans, and started being consumers, debt facilitates this process.

Debt can hold us back financially, impeding our ability to save and invest. It inflates the cost of everything that we purchase on credit, because we need to factor in the cost of servicing debt: interest and fees. Getting rid of debt, particularly unwise debt not only lifts a financial burden, but also a psychological one – it is an emancipation from credit enslavement.

The first step in dusting debt, is to stop buying goods on credit. Hide your credit cards, freeze them, cut them up, do what you need to do to stop credit temptation. A lot of this comes to back to part one, being conscious of our spending habits. You can’t get on top of debt, if you continue to spend on credit. Think about the things that you ‘need’ and want and make the commitment to save for them rather than go into debt for them.

The second step is to become aware of your debt position. Make it real. Write it down. Add it up. How much debt do you have? Make a list of each of the debts that you have, the outstanding balance, the interest rate and the minimum monthly payment and add up each column. Have a look at the minimum monthly payment column. What are you paying towards your debts every month? Wouldn’t you rather that in your pocket?

Once you have a clear picture of all of your debts, have a look at the articles on reducing debt using the techniques of snowballing and snowflaking. By analysing your spending, doing up a budget, and making a commitment to spend consciously and reduce your expenses, you should find some extra cash in the budget to accelerate your debt reduction, bringing you that bit closer to financial freedom.

Tomorrow I’ll conclude with part 3 of the series on gaining control of your finances. If you have any suggestions, please feel free to add them in the comments below.

Have you read these posts?

Category: budgeting and finance, money matters · Tags: budgeting and finance