Do you know where your money goes?
Household budgets are back in the news as they are squeezed by higher taxes and inflation caused by shortages of many products and services.
There’s never been a better time to nail down those numbers and take control of your spending.
Household budgets are personal because finance is personal.
When preparing financial plans with clients, the household budget discussion is often the element that causes more resistance than any other.
The reluctance to calculating how much is spent each month can come from a variety of sources such as a vision of wading through piles of receipts and assorted paperwork, a fear of facing up to what the total might actually be when everything is included or embarrassment or shame at what some of the items might be and how much they might represent.
Faced with barriers such as these, it is easy when creating a Financial Life Plan to take a short cut and quickly settle on an approximate nice round figure for your spending.
But that would be to miss one of the great opportunities of financial planning. Budgets say a lot about your priorities, how you want to spend your time and the things that are important to you. There is little or no point in crafting a long term financial plan that works to fund a spending budget that is unrealistic and won’t buy you what you really want.
The 50/30/20 rule
You can use a rule of personal finance which recommends that you should spend roughly 50% of your after-tax income on “necessities” (housing, transport, groceries and other bills), 30% on “wants” (dining out, travel, entertainment and so forth) and 20% of your income on savings or paying off debt.
The problem many people face when trying to get their personal finances in order is that they focus on trying to cut back the wants and ignore the importance of the necessities category which can have a huge impact on their finances because, for the most part, they’re fixed expenses paid on a regular basis meaning that getting them right up front can have a significant impact on total long-term spend.
Having a firm grip on where your money is being spent is the most important element in feeling in control of your finances. If it is something that you have been putting off, here are a few questions that will hopefully get you started.
Questions to get you started
Do you know how and where your money is spent every month?
Do you have a detailed budget for how much you should be spending?
Are you using one of the banking apps that automatically track your spending?
When you do list your regular spending, which item(s) are you likely to be most uncomfortable with and why?
Which items could you do without and could the essential items be purchased more cheaply or maybe less often?
If you can eliminate some unnecessary spending what would you really like to spend it on instead?
Try not to view your household budget as an accounting chore but as a chance to take control of your money and consciously choose how to spend it on the things that are most important to you and your family.
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