Where Is My Money? Part 3 - The Beginnings of a Budget

I hope you were able to go through our little exercise which started last week, as you can read HERE. If you haven't been able to even start or had missed out on some days, you can always try again this week. And unless your routine changes significantly week after week, a week's worth of recorded expenses can start you on your way to developing a budget.

Too many people start on a budget but fizzle out almost as soon as they started. There are a number of factors that contribute to such short-lived initiatives:

1. They don't know why they do it. They don't realize that budgeting is all about living out a lifestyle. If you're a bit lost yourself, maybe you can start right HERE.

2. They don't know where to start. Despite the availability of so many guides and how-tos, people still end up feeling stuck at the start, not knowing how to proceed. It's possibly due to conflicting approaches or ones that require them to change too much too soon. That's why we started with something simple in this blog, as you can read HERE.

3. They don't have much with to start working on. That's why we went through a bit of an exercise on recording our expenses, to give us a headstart on what are we looking at.

Ultimately, a budget is a personal exercise. And the less I impose on stuff here (like how to record, where to summarize, etc.) and stick with providing some sort of a roadmap, the more likely you can come up with something that fits you (believe me, you are that smart). Even my own approach is still evolving and will continue to do so. What doesn't change are a few basic items.

So, what to do now? If you already know your disposable income (as discussed previously HERE), you can deduct from it an estimate of your monthly personal expenses with the week's worth of expenses that you recorded (just multiply by 4, or maybe divide by 7 and multiply by 30 or 31). Hopefully, you will come up with some excess cash. If you did, Congratulations! But before you pat yourself in the back (which you probably deserve), just go over your expenses one more time to make sure of two things:

1. You didn't left out any significant expense. Most of the time you won't really get to realize it, especially with just a week's worth of information. As you gather more weeks of information, you can actually check if you haven't recorded some regularly recurring items, and adjust accordingly.

2. You recorded expenses not paid in cash. Maybe you've swiped your card for that lunch? Or that book? Otherwise, you will be creating the illusion of having excess cash when you actually are living on credit already.

Now, if your expenses exceeded your disposable income, you now know you are probably living on credit or off your savings. And if that trend continues, you can end up in some financial mess. Which is precisely what we will try to address in the coming weeks.

Make sure to brush yourself up on the previous posts, and start on some of the activities if you haven't done so. See you again soon. I will be more than glad to hear from your experiences so far.

Where Is My Money? Part 2 Starting the Habit of Recording

I hope you were able to accomplish the activity in our last post. If you are new here, you can click HERE to see the last post. Finding out where you are in the short-term isn't enough to manage your finances well in the long run, but it's a simple start for someone who has never sat down to think through where they are financially.

Now that you know where your finances stand in the short-term, and unless it shows reason for concern (like maybe you are already overborrowing without even considering your daily expenses), we can now proceed with the other part of short-term financial planning: knowing your expenses.

Some articles you will read will tell you to use this tool or that tool, which can show you over time where you are and how you compare with other individuals. That's not really a bad thing, and if you think you can handle it by now, you can go HERE and check out some of the tools that you can use to record and analyze your expenses.

But even if you use those tools, one thing remains: you have to record your expenses. Here are some tips on how to keep it simple yet effective:

1. Use what you've got. I usually have my cellphone with me all day. And since it allows me to store memo notes, I set up a note each day and record my expenses there until such time I can transfer it to a more organized setup. For others, you may be more inclined to use a small notebook, or even record directly into your computer.

2. Details, details. These would include knowing where you spent the money, for what, what occasion, when you did it, etc. Most of the information might have no use for you now, but these type of data usually become meaningful when seen over time.

3. Summarize it, but keep it simple. I use a spreadsheet like Excel to organize the items I recorded in item 1. The thing about personal finance is that daily expenses are usually about just a few major items like food, transportation, recreations, etc. You may want to use subgroups which can help you in your analysis. But the main thing is not to overdo it. One tip to check if you are overdoing it: if a subgroup has only one or few items in it after several days, maybe it's not worth it to categorize it and analyze later as an item.

4. Don't judge your expenses. Well, not for now, not yet. Actually, you would have become more conscious of your spending by the simple exercise of recording it. You are probably spending more carefully even now. But thorough analysis may have to wait later.

When do you start? Well, today's as good as any. You may want to summarize later, when you have some data to work with already. The important thing is to develop the habit of recording, which takes time. It may take a month or so before it becomes second nature. And you will definitely have your lapses. The important thing is to start as soon as possible and keep on it.

Related Posts:

Have you made your New Year's Resolution yet?

Where is My Money - Part 1

Where is My Money - Part 3

Where Is My Money? Part 1 - Finding Out Where You Are

If you are constantly wondering how much money you still have and where did the rest of your money went, you may suddenly find yourself in financial difficulty with hardly a clue how it happened. With one's personal finance, ignorance is never bliss because changes in spending and saving habits creep slowly over time. Only vigilance in knowing where you are can keep you in check and going in the direction you intend to go.

There are a number of things that makes it difficult for some people to ascertain where they are financially:

1. They don't know what to do.

2. They know something, but don't know if that is correct. And so they hesitate in doing what they know. Or they simply don't know how to go about applying it.

3. The personal nature of finding out about their own finances makes them cringe at the thought that they may be actually failing in this aspect of their lives.

4. They feel that what they will find out will require them to make significant changes in their lifestyles.

Managing one's finances well comes with experience. And it will almost always introduce change in your life. The important thing is for you to "own" this change, and not have it forced upon you. The problem with some financial management books is that they require you to do too much too soon. In some cases, they require you to adopt certain approaches that do not fit the way you run your day. Granted, managing your finances require organizing and planning. But it should be in a manner that does not hamper you unduly.

Taking Small Steps

There are a few simple things that you can start doing to slowly introduce yourself to the discipline of handling your finances. As a start, you can try to see where you are in the short-term.

Your Disposable Income

This is simply the money you have after deducting your monthly expenses from your salary. You would think that this is a common thing to know, and yet people receive their income and hardly consider how they spend it. If you can sit down and be able to recall how you spent your money last month, then you have taken a very important first step in managing your finances.

Your Cash Balance

This is the money you have, at hand and in your bank accounts, minus any other payables that is not automatically deducted from your salary. Your money include those that you have on hand and what you can have with you immediately, like savings/ checking accounts, time deposits, and short-term investments in government securities like Treasury Bills.

On the other hand, your payables are what you would need to pay for the whole year. The most common item here is credit card debt. Other items include regular payments for tuitions, maintenance, and the likes.

Why a year? For one, a year is a normal cycle, where the monthly ups and downs gets to be evened out.

The resulting cash balance will tell you at a glance if you are still in the positive, and what level of monthly disposable income you need to have in order to stay that way.

These two things are so common and simple, and yet most people would spend some time finding them out if you happen to ask them. Yet, the mere knowledge of these two items is invaluable in starting to handle your finances. They give you a shortcut on whether or not you can take that new gadget on credit, or if you need to cut back on that subscription, and other similar decisions. And like most knowledge, it immediately and quite unconsciously affect the way you handle your finances, especially your spending.

Take some time to find out your cash balance and disposable income and reflect on them. Those Aha! moments that you discover for yourself are really more important than any nugget of wisdom I can impart here. For the simple reason that this is all about YOU.

Related Posts:

The New Year's Resolution to make this year

Where is My Money Part 2

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A New Year's Resolution You Should Be Making This Year

The financial events of 2009 has forced the majority of people around the world to consider the way they handle their finances. It also has put to the test a number of long-held assumptions and beliefs about what it means to handle your finances wisely. One gets to wonder too, if there is a key that could simplify the process of surviving in these trying times. Fortunately, there is. You may not be aware of it but when people talk about cutting back on that morning latte or putting off spending for later, they are actually considering one thing: living within your means.

Why is living within your means a cornerstone in handling one's finances? For the simple reason that it's easier to take care of the resources (i.e. money) that you have than getting more of it. Likewise, it doesn't do you any good if you simply blow off whatever increase in resources that may come your way.

However, living within your means isn't a formula that one can hand over to you and it will work like magic every time. For one, that's a good thing. It means we won't have to take the same path to reach the same goal, and you won't have to wear the same suit that I am putting on. On the other hand, that's the challenge of it. Being a lifestyle, it requires constant attention, planning, and adjustment to make it effective as the world around us unfolds. There are key things we can consider, though, and they can act like signposts as we travel down the road.

Living within your means is NOT:

1. Being stingy. On the other hand, it should open up your doors towards generosity.
2. Living without debt. That may be good, no doubt about it. But being out of debt isn't necessarily what it is all about.
3. Spending on cash basis only. Again, a very good approach towards financial freedom. But not necessarily the goal.
4. Looking for a return for everything you spend. Sometimes you just want to have something or have fun. Living within your means should allow you to do that, rather than take the fun out of life.
5. Limiting the size of your dreams. On the contrary, you will set yourself up to systematically getting closer to them.

With that said, living within your means is really about:

1. Having a plan. Something that considers your goals and priorities in life, as well as your needs as you age, change your status, or enter a new milestone.
2. Understanding your environment. Being wide awake and aware of the impact that your decisions can make on you and your loved ones.
3. Taking life as a whole, rather than part by part. Definitely the most important thing.

So make living within your means a new year's resolution to work on. Any good resolution requires constant clarification, and through the coming posts we will attempt to do just that. We will take on some things we take for granted as true and consider them in a new light.

It will also require considerable determination. hopefully a better understanding of our finances will provide the needed inspiration.

Happy New Year Everyone!

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