Budgeting and not borrowing is the new buzzword
AS MORE people look to tighten their belts in the new year, budgeting can be a very effective tool in managing household finances.
During the boom years, many homeowners had no need to concern themselves with budgeting for their household finances.
Incomes were rising and so were property prices, so if financial problems did arise, borrowing was always an option. In many cases, borrowing was the main option. Today, this is no longer the case. Budgeting is the new borrowing and is vital as a means of financial survival.
According to Frank Conway of moneycoach.ie, budgeting is a change in the relationship we have with money.
The ultimate tool when establishing a household budgeting structure is an income and expenditure spreadsheet, according to Mr Conway. Detailed ones are pretty common on home PCs and on the web. They can even be amended to suit personal circumstances.
“It is also worth pointing out that an end to the current severe economic recession will not be an end to the personal financial difficulties for many. The Government has just announced a series of significant changes it will be rolling out over the next four years as part of the national recovery plan,” said Mr Conway.
Before starting on a personal budgeting exercise, it is important to have all of the facts. Generally, this is broken down to two key components, income and expenses.
On the income side, if one is a PAYE worker, then their recent pay stub or most recent P60 will have all of the required information. Self-employed are a different matter, but they should have sets of accounts.
“The big issue is on the expenses. I always advise people to focus on the small stuff because we all know the big expenses like mortgage repayments and insurance costs. For example, food snacking, smoking and odd little spends here and there can add up to the thousands of euro per year. So, for a four-week period, ask for and keep a receipt of everything you purchase,” he said.
What you will need is income documents, spending receipts, bank statement and credit card statements.
Once you have these, it is then advised to put together a list of expenses as follows:
The Unplanned Costs:
* Home repair and maintenance
* Medical bills
* Car repair and maintenance
The Expected Costs:
* Property taxes (€100, 2012 forward)
* TV license renewal
* Insurance and protection costs (life, home, health, car)
* Bank loan repayments
* Childcare payments
* Credit card payments
* Household rent or mortgage
payments
* Broadband connection
* Telephone
* Utilities (ESB, gas)
* Car payments
* Food
* Transportation
Random Costs:
* Books, magazines
* Entertainment
* Impulse purchases
Good Habit Costs:
* Sports membership
* Charitable contributions
Bad Habit Costs:
* Alcohol
* Cigarettes
Mr Conway said personal budgeting will allow you to see what money you need to make ends meet and live comfortably and which expenses you can live without.
“If managed well, it can even allow you to increase your plan for a comfortable retirement,” said Mr Conway.
However personal budgeting can fail if a person does not prioritise expenses and a failure to budget practically for normal out-of-pocket expenses like food and petrol. They can also fail if people don’t plan for the unexpected.
“This is a big issue for some people where say an emergency car repair expense can put a household budget in the red,” said Mr Conway.
Top priorities on any expense list are food and shelter. Shelter includes your rent or mortgage payment, as well as mortgage protection and car insurance among others. Next in line are essential utilities like heat, electricity and water service. Car loans are essential to a budget if a car is essential to your job.
Home insurance and health insurance should also hold a place on your list of priorities, according to Mr Conway.
“Along with discretionary expenses, low priority expenses include unsecured loans and credit card payments. Make sure your personal budget takes care of essential expenses and then consider the rest,” said Mr Conway.
People are advised to list their expenses by priority. List the total amount of each expense and the date it is due.
“If you’re not saving regularly, do allow for some savings, it will give you a buffer for the unexpected and serve as a bonus if nothing goes wrong,” said Mr Conway.
He said when beginning personal budgeting, it is not uncommon to find that expenses total more than income.
“Always take care of top priorities first. Then work on making practical decisions for the rest of your expenses,” said Mr Conway.
“If you don’t have enough money to take care of the priorities, you will need to find a way to generate more cash,” he said.
If a person can’t pay a bill or meet a minimum payment, they are advised to contact their utility provider or creditor and let them know.
“Don’t let creditors make budget decisions for you,” warned Mr Conway.
“Many people were lured into a false sense of financial security during the boom years. Expectations of endlessly rising wages led more and more people to rely on borrowing to fund their day- to-day financial needs,” he said.
“Today, personal budgeting can make a return as the keystone to personal financial well-being, but it is essential to follow some simple steps that have been proven through time to work.”
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