Many people find it hard to start a budget as they don’t know where to start. In addition, once they start their budget they find that it doesn’t work so they abandon the whole exercise. I’m going to give you the three step process to get you started and help you continue to use this budget into the future. Are you ready? Good, then let’s get started!
Step 1: Prepare your budget
You need to write all your income and expenses down in a spreadsheet format. You should prepare a 12 month budget but if you have never done a budget before, just list your income & expenses for 3 months.
Step 2: Prepare a bank reconciliation
Most transactions go through a bank account so use a spreadsheet to list the opening & closing bank account balances & all amounts that are credited and debited to your bank account.
Step 3: Set up control accounts to control your money
Some expenses such as groceries, rent and work travel expenses are taken from your bank account as weekly cash withdrawals. However, most bills are paid over 2 months, 3 months or even 1 year. It is important to use control accounts to set aside money for future bills and to account for yearly CPI increases to ensure you have enough money when these bills are due.
What should be your main goal in setting up a budget using this 3 step process?
- Step 1 should alert you to problems that you will encounter in either current or future cash flow. If you know that there could be cash flow problems in the future, you can take action now to stop these problems occurring
- Step 2 will make sure that you are accounting for all income & expenses. The transactions should include not only what goes through each bank account but through credit cards & via cash
- Step 3 will help you to set aside money for each bill until it is time for payment, it will show you if you are spending too much money on your weekly cash withdrawals, if you have enough money set aside for unexpected expenses such as a restaurant not budgeted for and it will show you if you have extra money to pay down debt from loans or credit cards.
Another important point in step 3 is that one of your control accounts will be an account called “10% investment”. This is money that you will set aside in order to invest for your future. There is no point working for 20-45 years if all you have to show for your working life is a modest family home and a few thousand dollars in the bank or worst still, not even that!
Congratulations, you now have the blue print to start and maintain your own budget for future prosperity.