To gain the most of budgeting, please forget about the concept of restriction and restraint often associated with household budgets. Budgets are not punishment or a means of restriction. They are important, useful tools that guide us to where we want to go. They allow us to plan for our future yet control our circumstances along the way. They are not meant to be exact, but rather flexible and accommodating.
A simple, practical, yet extremely effective strategy is the 40%-30%-20%-10% formula. It allocates your Fixed Costs (essential expenses that remain the same, such as debt repayments, mortgage or rental payments, insurances, etc), Variable Costs (essential expenses such as food and motor vehicle running costs) and Discretionary Costs (non-essential items such as holidays and entertainment expenses) according to the above expenses whilst setting aside 10% of your income as surplus to continually add to your savings and investments.
Starting with your present situation, use this formula to create a budget for the next year and five to 10 years into the future. Because the plan is based on percentages, it is flexible enough to adapt to changing times. As long as you set the formulas, the rest will follow. For example, in Year 1 your plan may be to pay off as much of your existing debt as possible. Set your fixed costs to 60%, variable costs to 25%, discretionary to 5% and 10% for savings. As long as you stay within the formula, you will meet your objective.
All good businesses set annual and 5-year budgets. They usually incorporate these into what is called a strategic plan. The strategic plan outlines where the organisation wants to be and what it wants to achieve within these timeframes.Your own household budget can follow these same rules and by setting goals for 1, 5 and 10 years, cover the main attributes of a constructive strategic plan for yourself.
A critical aspect of budgeting is comparison. We need to always compare what happened to what was supposed to happen. If you have a budget but never go to the trouble of comparing your actual expenditure to the budget, you are only using 50% of the system. It is important that on a regular basis you compare your actual expenditure and outgoings to what was budgeted. The variances will tell you how you fared.
Was your budget realistic? Did you under-budget? Over-budget? If the budget is unrealistic, modify it. Budgets should be dynamic tools, changing where necessary until you get the right mix. Did you overspend? Underspend? Was the budget reasonable but you simply broke the rules and fell back into bad habits? That's OK, the variances will guide you to where you need to focus your attention. Did you waste too much money at the supermarket? Spend too much on discretionary items? Are your fixed costs still too high? Correction. Correction. Correction. The variances will show you where.
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