Last week we expanded on the concepts in our 2012 Money Manifesto and explained why focusing on your financial education is the most important investment you could make for your future.

If you’re searching to find answers to your money problems, I can assure you that you will find the solutions in books, magazines, CDs, DVDs and Internet sites that deal with financial matters.

The first money success principle that you need to learn and apply is budgeting. Our Money Manifesto states: that “I will no longer be clueless about what I spend money on, as I will take the time to document all the expenses that I expect to come during the year. I will write down all my income sources and then calculate if my earnings can cover my expenses.”

There are two main reasons why budgeting is an indispensable money management tool.

Firstly, many people struggle financially because they are unaware of how they use money, and a budget forces them to honestly examine their spending needs. In addition, a budget allows persons to review all their expenses at one time and make informed and appropriate purchasing choices.

Let’s look at the process of creating a practical budget that can help you to take control over your money:

1. Identify all your expenses

Most budgets don’t work because they only itemise bills that need to be paid in a specific month. A budget is actually a spending plan that must cover all the expenses that you expect to occur over the course of a year. If you ignore bills that crop up occasionally during the year, you won’t be prepared when the time comes to pay them. Follow these steps to identify all your expenses:

* Write down all your regular monthly expenses such as groceries, utilities, rent or mortgage;

* Estimate the annual cost for bills that don’t come due every month such as cooking gas, car repairs, or school fees;

* Work out reasonable amounts that you think you can afford to spend on non-essential expenses such as entertainment and gifts;

* Recall what you spent in the past on unplanned costs such as home repairs or medical bills, and assign a monthly amount to put aside for possible emergencies;

* Create a wish-list for things you need to, or would like to spend money on but may not be able to afford now, such as retirement savings, vacation, or charity.

2. Convert expenses into monthly averages

If you have daily, weekly or yearly expense items on your list, you need to convert them into monthly figures before you put them in your budget. If you buy an item every single day, multiply the cost by 30; if you purchase it only on weekdays, then multiply by 20. Weekly bills should be multiplied by four, while you should divide annual expenses by 12 to get the average monthly cost.

Although you don’t actually have a monthly outlay for yearly bills such as car insurance, property taxes or education expenses, you still need to have an allocation for these expenses in your budget. The average amounts will help you to know how much money you should put aside every month to pay these bills when they are due.

3. Record expenses and income

Use a budget spreadsheet to record all your average monthly expenses. You can download a free budget template at www.financiallysmart.org. Next, record your sources of income. Use your salary figure less any statutory deductions, such as income tax and pension payments, but add back deductions for loans or savings. Then, calculate the totals of your expenses and income sources.

4. Balance your budget

Take the total expenses figure and subtract it from the total income figure. This will help you to determine if you are earning enough money every month to pay for all your expenses over the course of a year. If your income is greater than your expenses, you will have a positive balance called a budget surplus, while a negative balance indicates that you have a budget shortfall.

If you have a budget surplus, then you should save that extra cash every month. If you really don’t have additional funds on hand, then check to see if you have any ‘hidden’ expenses such as lending money to friends. A budget shortfall means that you are spending more than you can afford, or that your income is insufficient to pay for your basic needs.

Taking control of your money can be as simple as making appropriate spending choices. This budgeting exercise can help you to identify frivolous spending or conserve on expenses such as utilities and groceries. Declare along with the Money Manifesto: “I will question myself before I make a purchase, to determine if there are better uses for my money than buying that item.”

However, because of the rising cost of living, you may realise that you still have a deficit after cutting back as much as possible. The only remedy for this problem is to increase your income; and the budget shortfall indicates the required amount to earn each month. In an upcoming column, I will look at how to create additional income to meet your budget needs.

Copyright © 2012 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, January 12, 2012

Read another article about Prioritising Your Spending:

Wants vs Needs – Can You Have Both?

DON’T MISS MY NEXT ARTICLE! CLICK BELOW TO RECEIVE IT IN YOUR EMAIL:

Cherryl is a money coach and business mentor, and founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmartonline.com. Contact Cherryl