DAY 3 – Financial Planning Week 2012

A budget is an essential part of a financial plan. After all, the amount of money that we’ll earn in our lifetime is finite so it’s really important that we’re as efficient as possible with it.
Before we look at the rules it’s useful to look at what implementing a budget will do for your financial situation…  That’s right. Sticking to budget will help you achieve a surplus. So how do you do it?

Rule 1: Give every £1 a job
Every single £1! Breaking your money up into smaller, laser-focused goals gives you the information you need to make good spending decisions. If your current account balance is all the information you have to make a financial decision, the decision might not be a good one. The problem is compounded if you’re in a shared-finances situation. By applying Rule 1 you’ll find much more discipline in your spending habits and inevitably end up with a surplus at the end of the month.

Remember: deferred spending to achieve YOUR financial goals.

Rule 2: Save for a rainy day
With Rule 1 you give every £1 a job. With Rule 2 you look for future jobs for your money. This one’s the game changer. You notice that your house insurance is due in 6 months and is likely to be £300. Each month you give a job to £50 for “House Insurance”. After 6 months you have £300 whose job is “House Insurance”.

Look for big one off bills and include them in your budget. Rule Two is about anticipating the unexpected. So yes, you budget money into the ‘Car Repairs’ category every month (even though you don’t know when repairs will be needed or how much the repairs will cost). That money stays in that category until you use it. It grows from month to month

Budgeting this way makes the unexpected expected. No more surprises.

Rule 3: Roll with the punches
When you overspend in a budget category for the month, roll with it! You make and change plans all the time. If you plan a day at the beach with the children/grandchildren, but the day turns out to be rainy and cold, do you still go to the beach? Of course not! When circumstances change, you change your plan. Your budget is no different. If you overspend in a category, look through your budget and move some money around. Remember, you’re the boss!

This forces you to prioritise and decide on what’s important to you. This is great because they are your financial goals and your budget and you get to decide what is important enough for you to spend your money on.

Rule 4: Live on last month’s income
Spend this month, what you earned last month. How? Save enough money to go an entire month without touching your regular income. Then the next month, spend last month’s income while earning this month’s income. You’ll spend this month’s income next month.

Implementing a budget that enables you to spend last month’s income this month is just the start. Once you have a one month surplus why stop there? What about 2,3,6,12 months surplus? Imagine spending January’s income in July!

Once you’ve got a surplus that gives you plenty of breathing room (think 3-6 months regular expenditure) is time to think financial goals because the budget foundation is well and truly in place…

The four rules of budgeting are part of the methodology of budgeting software provider http://www.youneedabudget.com . The good people at YNAB have a wealth of resources on their site and their software is superb. I receive nothing from them for recommending their software. I use it for my personal and business budget. End of.

Picture credits: Carl Richards (http://www.behaviourgap.com)

Day 1: I’m going to start by challenging your view of money (if you have one).
Day 2: I’ll explain why budgeting is essential and how it will help.
Day 4: I’ll explain the difference between savings and investments and what they’re for.
Day 5: I’ll explain how using a financial planner can help you.