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Managing A Budget

Manage Money or Lose It

Once you have started using a budget it would be wise to pay attention to it for the rest of your life. Any slack periods could see your wealth disappear out the door. Money is like water behind a dam, the more you have the more pressure it exerts on the dam. Leaks happen through inattention and the more money you have, the more a leak will look like a river than a hose pipe.

 

Dam

 

I create a budget for the financial year and store the details in a spreadsheet for every month, one column equals one month. I account for every cent and review my spending to ensure I’m on target.

Money Management Tips

Some tips;

  • Withdraw all your petty cash for the pay period in one go.

    • This will minimise withdrawal/ATM fees. It will also allow you track your expenditure directly (by monitoring the allocated cash on hand) and prevent blow outs by going back to the ATM numerous times.
    • You can take out your monthly spending money in one go and then divide it into weekly amounts and separate them.
    • Keep one week on you at any time and ‘pay’ yourself exactly 7 days apart.
    • You will soon learn to ration your money quickly and make it last.
    • Giving yourself pocket money each week is best, waiting around too long leads to temptation.
  • Put every fixed bill on automatic direct debit.

    • There’s nothing worse than turning money management into a chore by having to go to the post office or bank to pay bills.
    • Automate your finances as much as possible and review your statements regularly to note irregularities or changes.
    • You may even want to put variable bills like electricity and water on direct debit, you can allocate a maximum amount in your budget and when less is drawn, the leftovers will be a surplus for savings.
  • Schedule transfers.

    • This removes the chore from money management.
    • Internet banking is wonderful for self-management - use it to automatically shuffle your funds around at key times during your pay cycle.
    • I have my regular savings automatically transferred into my wife and I’s savings account at the start of our pay cycle.
  • Have a joint account for all household bills and have each responsible person transfer their share on a mutually agreed basis.

    • All incoming transfers should be marked with the senders initials and its purpose, e.g. 'XY Monthly Bills'.
    • This will make it easier to audit in case someone wants to skip their share of the bills.
    • Always put a little extra in each period to build up a contingency fund, a buffer in case of emergencies.
  • When moving money around make sure you use unique transactions for ease of tracking.

    • If someone owes you $100 and you owe them $150 don’t just send them $50 (the difference), perform two clearly marked transactions ($100 and $150) with a description with the senders initials and a reason, e.g. 'XY Book Purchase'.
    • In a couple of months you can go back to the statement and show the person ‘See I DID pay you’.
    • Otherwise the detail is lost and uncertainty creeps in, which could lead to conflict.
  • Align irregular bills with your pay period, e.g. yearly, quarterly, monthly, fortnightly and weekly.

    • Bills all come at different intervals and should be aligned and paid from your regular pay, passive or earned.
    • Most bills come monthly but car registration comes yearly, so I divide the anticipated cost by 12 months and pay it into my bills account monthly.
    • If you don’t know what something will cost ahead of time do some research otherwise you could be signing a ‘blank cheque’.
    • Make the effort to find out and this method will serve you well.
    • Not doing this raises a high risk of being short.
  • Aggregate shorter period pays from employers and have your own pay cycle.

    • I have in the past been paid weekly and fortnightly. My bills still came monthly so I didn’t touch my incoming pay.
    • I let it sit until the 15th of each month and then I ‘paid myself’.
    • All my petty cash was already withdrawn for the month and the bills paid themselves through direct debits.
    • I left my key cards at home so I wasn’t tempted to spend more.
  • Split longer period pays into shorter ones.

    • The opposite of shorter period pays (above). Hold the payment in a holding account and 'pay yourself' on your fixed pay period.
    • If you receive passive income then ensure it is paid on a regular basis, like monthly.
  • When buying a new item, make sure you understand the costs of ownership and factor this into your budget.

  • Sometimes buying something can be expensive to operate.

    • For example a car is a lot of money to buy, AND to run:
      • Registration.
      • Insurance.
      • Fuel.
      • Maintenance.
      • Wear and tear items like clutches, tyres, brakes, etc.
    • Talk to the service department to discover these costs.
    • Determine how often these costs are required then split and add them into your pay cycle.

Loans May Reduce Expenses

Leasing an item can free up considerable cash for investment. This strictly could be viewed as a debt, but consider the following – there are many ways to purchase a depreciating item, but which way minimises the losses?

 

One major purchase to consider is a motor car. They are either expensive to buy or if bought cheaply, expensive to run. Transportation is a major factor in our lives and can be a costly one.

 

Consider a $25,000 car for 5 years. At the end of 5 years it will be worth approximately 30% of its initial value (check for these percentages in your country), which is $7,500 with a loss of $17,500, or $292 a month. If you pay cash for the vehicle, this is what you will lose each month. If the car is worth more than $7,500 in 5 years then that will be a little back in your pocket.

 

If you take a loan for the whole amount then this may cost you $530 per month (depending on the interest rate), but a lease (or hire purchase) would cost around $435 a month (depending on the interest rate and the residual payment). If you leased the car and invested the $25,000 in cash you would have spent for a modest 10% return you would earn $208 a month or more. So in effect the car would cost you $227 a month ($435 – $208), by far the cheapest option – the $227 is cheaper than losing $292 by paying for the car outright.

 

In some countries you can even get a novated lease which can factor in running costs and the lot can be used as a tax deduction netting you an overall greater saving (please see a qualified adviser).

 

Obviously this method is only for those who must have a car. Best to not to go into debt if you can avoid it - pay cash for a cheaper car - then save.