9 Feb 2010

16 Steps to Your Most Successful Budget Ever


The reason why so many people abandon their budgeting ambitions after just a few weeks is because they have been advised to do it in a logical but unfortunately uninspiring way.
Personal budgeting looks like another branch of accounting and financial forecasting but actually it is much more about personal development, self-awareness and pure psychology.

One of the most successful coaching gurus, John Whitmore, uses a GROW model to help his clients achieve their goals and change their lives. And as Dave Ramsey says “money is 80% psychology” – so I suggest to combine the two and use GROW model for your personal finances. And here is how!

Have a look at the 16 steps that will help you set up your first financial plan that you also will adhere to long enough to see its true benefits!

GOAL – defining what you want to achieve
1. Establish your financial goals.
Forget your expenses, bills, debt repayments for a moment. Define what you want to achieve by the end of your financial year (being 12 months from the date you start budgeting) and beyond (ideally for the next three to five years).

2. Define your goals in detail.
How much do you want to spend on your birthday? How much would you like to spend at Christmas? How quickly do you want to re-pay your debt? When do you want to buy a new car by?

3. Set your priorities.
I know that you’ve heard 100 times that you first need to re-pay your debt, in particular on credit cards, BUT some of you might be comfortable paying credit card debt a bit at a time. It’s your call really, however if you decide that carrying debt around affects your outlook on life, your mood and hinders you to achieve other goals, than it might be a good idea to tackle debt first.

4. List your goals starting...
... with the smallest one and ending with goals that don’t have an end date (e.g. you are likely to have car repairs and service costs each year so you may want to have a rolling saving goal rather than create a car maintenance goal each year anew). I have talked about snowball saving last week in detail.

5. Allocate your contribution.
Use your gut feeling – how much can you save toward each goal? Divide the amount by months (or weeks) remaining and see how the result feels – do you think you can pay in that much/little?

REALITY – exploring the current situation, relevant history and future trends

6. Check out your bills.
Only now is it time to look at your current expenses. Some expenses are like evil trolls – now you see them – now you don’t. These trolls are also known as irregular bills. The best way to hunt down 99% of your expenses is to list what you pay during each YEAR, not a month! List all your planned expenses, write the amount and the date it’s due. Important: Divide the amount by months/weeks left until the due date. This will give you the amount you need to “save” each month to be able to pay your irregular bills when they become due

7. Estimate your spending.
OK, this one is a bit frustrating, sometimes… My personal advice that worked wonders for me – ask your trusted friend to do this bit. Why? They are likely to be objective; they won’t “overlook” an impulse buy because they don’t feel anything when looking at your numbers. They don’t feel ashamed, guilty, or anything else – for them your bank statements are first of all just numbers. Use your bank statements to estimate an average spend per category for the last couple of months. When I did this bit I found out that I used to take 30% of my money as cash during the month and there was no way I could track what on earth I spent that money on…

8. List Your Earnings.
Please, please, please – check out the web, local authorities, and charities to find out if you are entitled to something you are not claiming! Child benefits? Childcare vouchers? Tax credits? Tax deductibles? Grants for house improvement (e.g. for solar panels, better boilers, etc.) Overpaid your taxes last year?

9. Establish your “state of affairs”.
That’s the obvious step: first see how much is left after you have paid all your bills and saved for irregular payments; now have a look how much is left (if anything) after you have deducted your monthly spending on daily outgoings. I use a state of affairs calculator online. It's pre-set to be in pounds but would work for everyone as long as you don't deal with multi-currency

OPTIONS – coming up with new ideas for reaching the goal

10. What are the options?
Have a look at your goals you’ve identified earlier. How much money have you allocated and how much is left in your current “state of affairs”?

11. Paying off debt?
If one of your top priorities is to pay off debt – now is the time to decide how you want to tackle it. Snowballing? An Avalanche? Leave it as it is? Can you move some of your debt to a 0% credit card? Can you consolidate? The best debt repayment snowball calculator I came across on the net - this one takes into acount that some of your credit cards may have a 0% introductory offer. It creates a schedule for you that aims to pay off thst "free" debt first.

WHAT/WHO/WHEN – deciding on a concrete plan of action

12. Reducing the cost.
This one is one of the most rewarding steps on the way to your best budget ever! It doesn’t matter if you overspending or not – the less you pay others the more is there for you (to spend or to save)! Start with less painful stuff. Re-negotiate contracts, look for better and cheaper providers; investigate if you’ve been overcharged and if and how you can claim your money back. What insurance policies do you have and how many do you actually really need? Cancel stuff (subscriptions, memberships, etc.) you haven’t used in the last two months.

13. Structure your spending.
How does you financial health look right now? Are you able to achieve your goals on time? Do you want to achieve them quicker? Have you been paying overdraft charges in the last couple of months? The first month of your “new you” allocate spending amounts that fell like “yep, that’s I think how much I spend” you will find out quickly if your gut feeling was right.

14. Choose your approach.
How do you want to plan for your future? Do you like total control? Prefer rough estimates? Choose structure over a loose framework? Choose what works for you! There are so many ways you can budget – you are bound to find something that helps rather than hinders you.

15. Decide on your next steps.
How would you like to save? Read about a saving snowball to get an idea on how to prioritise your goals. Do you need any sort of emergency fund? Read about my approach to emergency funds and why I don’t save as much as is widely recommended.

16. Re-visit your budget.
Have a look after a month on how you are doing. Are you on budget? What needs tweaking? What is the best way to stay on track? Would you like to have your budget on Excel or online? Do you prefer full-blown budgeting applications off or on-line or perhaps you just need a simple tool?

Now, do you think you can give budgeting a go?
If so, take a quick test to find out which approach to budgeting suites your personality most!

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Anonymous said...

I think #6 is so important when you are trying to rid yourself of the paycheck to paycheck cycle. That yearly car inspection bill or yearly sewer bill can send all your budget plans right out the window if you are not prepared. I add up all my YEARLY bills and divide by 12 to save monthly so I'm prepared!

Anastasia said...

I agree, and the other important bit is to calculate how much you need to save based on how long you have left until the irregular bill is due! SO if your sewer bill is due in two months you need to save more than a 1/12 a month:-)

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