Chapter 1
Know Where Your Money Goes

Many people are concerned about making ends meet. Money seems to run out while there are still some days before the next pay is due. This problem can be the result of not keeping track of one’s spending and, as a result, overspending, where the outlay becomes more than the income. Things may be bought on impulse – perhaps they were on sale, but really were not needed.

When there is no spending plan, purchases can be made without considering what is really important to have money for – food, rent or mortgage, utility bills; and what isn’t – for example, a meal at a fancy restaurant or an interesting household gadget that is on sale. Let’s consider making a plan for spending so that there will be money for the necessities, as well as for some special things.

Expense and Income Analysis

Firstly, it is important to know where your money presently goes. To find out, do an analysis of all the money you have spent in a week, fortnight, or a month. To do this:

1. Keep all receipts and make a note of costs where you received no receipt.

These are expenses for food, entertainment, fuel, and all other payments, large and small.

2. Create a table on paper or computer where you have a column for the various expense categories.

Examples of categories are listed below, but can be adjusted to your specific needs by further subdividing, adding, or deleting.

• Food (included can also be toiletries, stationary, postage, washing powder, and other regular household items)
• Utilities (electricity, gas, phone, Internet, etc.)
• Car costs (fuel, oil, servicing, insurance, registration)
• Home maintenance (rent, repairs, insurance, furnishings, computer accessories)
• Miscellaneous (this can be a catchall category for clothing, entertainment, books, and other occasional purchases)
• Medical and dental costs

3. Add up all the costs in the various categories and make a note of them in your table at the end of a pay period (week, fortnight or month, whichever applies). 

Some payments are made annually, some quarterly, others monthly, so if necessary, prorate these for your pay period. For example, if you pay $100 per month for electricity, the weekly cost would be about $25 and fortnightly about $50.

4. Add up all the columns and work out the total expenditure.

Now you know how much money you have spent in a given time period. You can do this over several weeks to see what the average is. (See Appendix 2 for an example of finance tables for both income and expenses.)

Having analysed your expenses to have an idea where your money has been going, now analyse your income from all sources – job, pension, investments, bank interest, etc. Add these up and prorate, where necessary, for a month or fortnight, depending on how often you wish to budget for. For example, if your bank interest is paid quarterly, divide the amount by three to obtain a monthly gain. The total income from all sources over a period of time will become your usable income for that period.

Creating a Balanced Budget

The next task is to ensure that your spending is in line with what is available to spend, without getting into runaway debt. You might like to set your financial goals along the following lines:

• To have enough money for buying what is needed and a few extras for enjoyment.
• To consider every contemplated purchase in terms of whether it is really needed.
• To avoid unnecessary costs in interest charges. 
• To have money left over from each pay to set aside for special needs and emergencies, or to save for something out of the ordinary like an overseas trip or an item of desire.

So let’s see how we can create a balanced budget that will help us fulfil our financial goals.

You have analysed how you have been spending money and listed all your income. Now take another look at the expense table you have created. If your income and expenses are roughly the same, or better still, if your income exceeds your expenses, that’s great – keep up what you are doing! If, however, your expenses exceed your income, you need to make some adjustments. To do that, consider what expenses in each category are essential, and cut out the rest. The essential expenses, with ideas how to reduce them, will include:

• Food and basic household items – you don’t want to go hungry, but you may want to limit visiting fast food outlets. Instead, buy a few ingredients in the supermarket for healthier and cheaper dining.
• Utilities – these are essentials, but sometimes one can get the same service for less cost. You may like to check around whether you can find an electricity provider or Internet service provider that will give you a comparable service, but charge less.
• Car costs – a family car has almost become a necessity, with limited or time-consuming public transport being the only other option. However, if your family has two cars, could you get by with just one? Or, what about a smaller, more economical car instead of a four-wheel drive, that seems insatiable for fuel?
• Home maintenance – we all need a roof over our heads and a bed to sleep in. However, if necessary, costs can be cut by downsizing, reducing insurance payments by increasing the deductable or excess amount, and even possibly renting out a spare room to a student or a single person.
• Miscellaneous – this category may have several unnecessary expenses. Take a careful look at it.
• Medical costs – these will depend on each individual or family and their needs. Consider a healthier life style as a way to getting sick less frequently, and that way cut down medical costs.
• Other ideas to keep spending within the limits of your income are:
• Question every expenditure. Even small amounts add up to quite a bit after a time.
• Learn from past spending mistakes. Have you bought things that now you wish you hadn’t? Make sure that what you spend your money on is something you really need and will use.
• Whenever possible, look for sales. Also, consider buying used items. Often you can’t tell the difference between second-hand and new items – and used things cost a lot less!

Paying Yourself

One more category needs to be added to your budget and that is Savings. We pay everyone else because we have to, but should ideally also include a payment to ourselves. This would be in the form of putting money aside for unforeseen needs or an emergency, as well as an unexpected opportunity or to be able to, in time, buy something special for our enjoyment.

Financial advisors suggest putting 10% of one’s income in savings for this purpose. If that’s too much, a smaller amount each period is better than nothing and will add up over time. To keep motivated to save, set goals and write down what you are saving for, for example, a trip, a new computer or a better car.

You’ll reach your financial goals faster if you open a savings account at a bank. Money kept at home within easy access can soon disappear with the temptation to justify using it. Money that is banked is safe from impulse spending and also earns interest. Find a bank that best suits your needs – giving you a reasonable interest and charging minimally for servicing your account. Of course, don’t get into a habit of making frequent withdrawals from your savings account.

Financial Discipline

The next step is to look again at both the income and the necessary expenses and to marry the two by assigning money to each of the above categories.

After you have made a spending plan that is within your means, determine to stick to it. This takes discipline and some self-denial, but is not impossible. In the long run, it will be worth the effort and sacrifice, and indeed rewarding.

If you avoid overspending and charging up your credit cards over what you are able to pay off when the monthly payment is due, you will save money on interest. Remember that banks charge around 20% a year interest on unpaid credit card balances. Money you had spent in the past may still be collecting interest, and you could be paying for things that no longer exist or are usable! These interest savings can then be put toward something special that you really desire as a reward for balanced spending and living within your means.

 Readiness for the Unexpected

Having created a balanced budget and resolving to stay with it will go a long way.  However, what if something unforeseen happens? In this time of economic uncertainty, this is not out of the realm of possibility. So let’s have another look at your finances and help you to not only be covered when all is going well, but to also financially survive a major setback.

Consider the following:

• Are you on a cash basis (except for a home mortgage) or are your credit cards charged to the hilt? If the latter is the case, make a plan to get out of unnecessary debt, or consolidate your debts, so that you’ll pay less in interest. More on this later.
• Is your family budget dependent on an income that could disappear? For example, if one of two income earners loses their job, would it be a financial disaster? Consider living on one income and put the other one in savings. If you look hard, you’ll probably find some unnecessary expenses that can be cut without a major sacrifice.
• How would you fare in case of an unexpected disaster – fire, medical crisis, or even death? Are you adequately covered by insurance? Where a young family is at home, some kind of income protection, disability insurance, and/or life insurance would be important in the event that the breadwinner became incapacitated. Also important is to have some savings to be able to draw on in emergency. In addition, make sure that you have made a will, so that in case of an untimely death, your grieving family wouldn’t have unnecessary problems with inheritance issues.

In summary, analyse your expenses and compare them with your income. If you are spending more that receiving, cut your expenses to include only the necessities. Create a balanced budget and determine to stay with it. If at all possible, put some money into savings. This will help you to be prepared for the unexpected to which no one is immune.

For a succinct summary of the steps in this chapter, see Appendix 1. For an example of income and expenses analysis, see Appendix 2.