Nothing highlights people’s different psychology better than their attitudes towards personal budgeting.
Some of us are inclined towards being a little careless with our personal finances. It’s not unusual to find people who genuinely don’t know how much they’ve got in their bank account or what expenses are going to hit them in the weeks ahead. Many such folk seem to fly their monthly finances by the seat of their pants.
Then there are those who seem to be frustrated accountants. Everything is logged, listed, reconciled and balanced. These types of people always seem to know exactly what their position is to the last cent and seem to be capable of forecasting exactly what it will be in a month’s time!
Perhaps the majority of us are not at either extreme. We may roughly and instinctively balance our personal finances but perhaps are not always in full and tight control.
The Importance Of Personal Budgeting
People tend to judge us on different things. Our friends and family may primarily judge us on our personality and amicability. Our bosses and co-workers may judge us on our efficiency, hard work and intelligence.
Yet many institutions and organizations will judge us based upon perceptions of our financial responsibility. This of course includes banks and other loan companies but also insurance companies, our employers, credit card companies and so on. People in the other categories above may even use these hard objective factors to evaluate us even if they don’t consciously intend to.
As an example, many of us have experience of friends who seem incapable of managing their financial affairs and who live in a permanent state of financial chaos.
However good a friend they may be, if they seem to be incapable of managing their own personal finances would we ever trust them to manage a situation where our own money was involved?
Financial Crises Versus Poor Planning
Let’s be clear. If you are in a financial crisis caused by losing your job or suffering a serious illness that prohibits you from working, then no amount of personal financial planning may be sufficient to stop you slipping into deep trouble.
Those circumstances are exceptional and both prevention (perhaps via insurance) and emergency help require special solutions that are outside the scope of this article.
What is true though is that all too often we can drift into financial troubles and chaos not because of exceptional circumstances but because of our own poor planning and management.
In his novel David Copperfield, Charles Dickens wrote what has become a famous passage:
“Annual income twenty pounds, annual expenditure nineteen pounds nineteen & six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
Leaving aside the archaic British currency, the point was clear even 150 years ago. If you have more money going out regularly than you have coming in, then you’re going to end up in a miserable situation.
Personal Financial Planning
To control your personal budget is relatively easy.
You simply need a list of things you must pay out each month to survive. Typically this may include things such as the power bill, your fuel costs, rent or mortgage payments, average weekly shopping costs, credit card repayments and so on.
To this you need to add those costs that are not regular but which you know do hit home from time to time. So for example, if you know that last year you spent 1000 dollars on car repair and maintenance then maybe in the future in might be smart to put aside say 100 dollars per month into the ‘car repairs emergency’ fund.
Once you add-up your regular invariable outgoings and have also factored in a monthly amount for the variable items, you have to compare this against your average monthly income.
Hopefully there will still be a positive balance showing that you have more income than outgoings! This balance is called your ‘disposable income’ and it represents the amount per month you can spend without putting at risk the core basics of your financial life. It is the amount that may allow you to save something, go out for meals, buy presents for birthdays or take that annual vacation etc.
In a sense, that’s it!
When 2+2 = 5
That may all be fine and dandy, but if you’ve done your sums and the outgoings exceed the income, what can be done?
The answer to this is simple; you had better either cut your regular outgoings or increase your income very quickly indeed (or both). You can put things off for a while through credit and loans but sooner or later your chickens will come home to roost and you’ll be in trouble whether you’ve planned or not.
The Role Of Technology
The reality of our lives today is that while making such lists is relatively easy, in fact maintaining them to reflect the complicated and highly variable complexities of our financial affairs on a day-to-day basis is a bit more difficult.
Bills that we haven’t expected arrive from nowhere. We may be lucky enough to get some income on the same basis. Our regular monthly bills may go up and down leading to difficulties in balancing and forecasting the exact position at a given time.
You can try and use that pocket notebook or household ledger book left to you by your grandparents but there are modern alternatives.
You can get now for your PC, PDA and even smart-phone, various software packages that can help you track and forecast your personal finances and cash flows etc. The prices are reasonably cheap (some may even be freely downloadable through the Internet) and it may be a lot better than getting that irate call one day from your long-suffering bank.
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