In my previous post about Money Management Basics, I mentioned budgeting. Today, I get to make good on that promise to bring you more information. So what is a budget anyways? A budget may be defined as an estimate of both one’s income and expenses over a specific time period. That time frame can range from one month to one year; however, for personal finances, most people use one month. It can also include your cash flow, the assets you own and any savings that you may have.
Now that we know what a budget is, let us break it down a bit further. What are some of the expenditures included? Mortgage, student loan, car note, utilities, phone (whether prepaid or postpaid), credit card, personal hygiene, entertainment, et. cetera. Anything at all that you spend money on is an expense. The other part of your budget is your income. How much money do you actually take home?
Regarding income, how many persons know the difference between their gross and net income? Your gross income refers to the total sum of money earned before your deductions are withdrawn and expenses paid. More often than not the deductions are taxes. The taxes withdrawn vary by country however; here in Jamaica those include Income Tax, NHT, Education and NIS. Some of your bills might be covered via salary deductions but those are still expenses. Salary deductions might include insurance, car note and loan payments. Salary deductions can also be a positive thing, as they can be used for mandatory saving. In this regard, you put a portion of your money into savings before you even get a hold of your pay cheque! On the other hand, your net income is what is left, after your deductions have been withdrawn and your expenses have been covered. I know, I know that for some persons that is literally $0. There is hope…I will return to this point.
Why is it important to create a budget anyway? Well, if you don’t know how much you are spending, and on what, how can you become financial free? The vehicles to financial freedom include reducing your expenses, increasing your income through earnings from multiple streams, or a combination of both. The only way to know whether your problem is income only, expenditure only or both, is to do a budget. You can’t know that without doing a budget. Simple.
Well, what happens if you do your budget and at the end your balance is $0? Or, worst, what if you have a deficit? There is no need to feel as though there is no hope. I was there. Yes, in my very first conversation with my financial advisor I was dragging over $30,000 Jamaican Dollars in deficit, every single month. Fast forward three years later, I am not fully out of the woods but I am on my way. The choices one will have to make are as individual as each person and their situation. The sacrifices are hard and sometimes you will second guess yourself. I have increased my streams of income by monetising skills and taking on extra workload. Some of my debts have been reduced but, I still have a lot more to pay off. Some of my debt is in USD currency, and we’ve all seen the Jamaican Dollar’s instability against same. I have also drastically cut back on spending. A lot of things I once thought absolutely necessary to my life and well being, I have been surviving without. Nonetheless, I can see a glimmer of light at the end of the proverbial tunnel. I had and still have a plan to pay off all of my debts within a particular time frame.
Until then, would you like a budget template with which to work ? I have one from my financial advisor that you can use. You plug in the values for your expenses and your salary and the budget sheet calculates the rest for you. Click here to access the link for the download. This is a tool that you can use even if you are already financially free.
Now that you know more, will you actually do a budget?