By Francisco J Colayco
One of the most difficult parts of every day life is budgeting. Few people in this world can just spend with unlimited abandon. It is extremely easy for buying to go out of control especially if you have a credit card and if you have a checkbook that is not properly reconciled. The biggest problems in budgeting happen right after a big event like a vacation, wedding, birthday, Christmas etc. You have to be learn to budget, not only for your everyday needs but also for all these special events that will come into your life whether you like it or not. If you do not have such a budget, you will not be able to move on making your personal financial plan because this requires a long-term commitment.
Budgeting always requires discussion of between you and your spouse, if you live with someone. Otherwise, you will never be successful. If you know how to use the computer, it will be very much easier for you. In fact, there are many computer programs that will help you keep a reconciliation of your checkbook, keep track of all your loans and investments so that you know at any one time how you are doing. The program can also quickly show you if you are within budget or not for each specific item.
However, as in any computer, you have to diligently put in all the information and especially, in the beginning, this requires a lot of time and commitment. After inputting all the initial information, you still have to be disciplined to input the daily information. The computer is actually at the same time easy and difficult for budgeting. We may end up following the regular manual method.
Here are some steps to follow:
It is always better to have a daily budget but this might be too tedious. Therefore, a weekly or monthly basis might be more realistic. The first step is to understand all the cash that you will receive. If you are an employee, it is your take-home pay. Your company should have removed from your take home pay all the taxes, SSS, Philhealth, insurance and any other contributions you might be making to your company retirement plan etc. You should go to your Personnel Department and understand all of these deductions. If, for example, you do not have tax deductions, SSS, Philhealth, insurance, you should understand why and there could be valid reasons depending on your contract with your company. You may need to cover yourself for these because you will definitely need to pay taxes. It is always good to be covered for SSS, PhilHealth and other insurance especially if you need to be hospitalized. You will be surprised how much these coverages can help you. If necessary, you need to make arrangements to cover yourself.
If you are self-employed, make sure you pay yourself a salary and cover yourself properly.
Computing your take-home pay after-tax and other deductions is the easy part. Now you have to determine your cash outflow or expenses. As we discussed before, you need to involve your spouse. You have to agree on the amount of your most important regular or recurring expense, your payment to yourself or your savings. Your savings is your expense for the future. Write down all your other monthly expenses that are recurring. For example, loan installment payments, electricity, phones, water, TV cable access, normal credit card charges, food, transportation, grocery, marketing, househelp pay, and general miscellaneous. You should have been keeping copies of your past bills and receipts to be able to check on the actual amounts paid. If you didn’t, just give yourself a good estimate and keep your bills and receipts from now on.
After you have calculated your regular monthly expenses, you now have to compute the non-recurring expenses during the year that do not happen every month. For example, taxes related to your house and other real estate properties, car insurance, home insurance, and life insurance, Christmas, vacations, birthdays, and an emergency fund. Get a total of these expenses and divide the total by twelve. With this, you will have a good estimate of the monthly amount you should budget for these non-recurring expenses.
Set aside the amount for the non-recurring monthly expenses. Open a separate account for this in a savings account, and you should pay all these expenses from that account. Each month you should deposit the monthly amount for these non-recurring expenses in an interest earning account, no matter how small the interest rate is. In this way, you will keep them segregated and will be better able to determine if you are properly funding for them.
Add both the recurring and non-recurring monthly expenses and subtract the total outflow from the inflow. In this manner, you can really understand how much money is coming in and where it is going. If you are over or under estimating your expenses, you should immediately make the necessary adjustments. If your inflow exceeds your outflow, you have additional cash to increase your personal payment to yourself that we talked about in this article or to add to emergency fund. If you are spending more than you are earning, you are either going to have to increase your regular revenue or decrease your expenses. Borrowing money to accommodate your recurring and non-recurring expenses will only bring you disaster.
This system of budgeting will definitely help you pay yourself first and live within your budget.
Reminding you that my new book “Wealth Reached. Money Worked. Pera Mo, Pinalago Mo!” is now available. We also have seminars for those in Manila. Check out Colayco Financial Education site.
You can also visit www.kskcoop.com if you want to consider investment options.
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