2 July 2008

Budgeting - getting it all together

Shelling peas from the Carl Larsen gallery

I'm not going to hide the truth, learning how to deal with money is difficult. It will require that you throw away those ideas you've probably lived with all your life that lead you to buy whatever you wanted. Modern life gave us the credit card and the notion that it was okay to immediately buy the things we used to save up for. I was well into my 30s before I got a credit card and could then buy what I wanted, when I wanted it. And not only that, I could also buy more of everything, as well as things I didn't need, and soon I had too much of everything. I kept buying, the shops and bank kept getting richer. I look back on that time now as a sickness, it was something like an addiction. I kept buying because it made me feel better, eventually I was shopped out and buying felt good for shorter and shorter periods. Eventually, buying was just a habit and what I bought didn't satisfy me at all.

I stopped cold turkey.

That's not an option for everyone. Some of you still need to shop because you're still building your lives, still have children to care for and are probably working, which requires a certain level of grooming and decent clothing. I want to encourage you to shop at op shops and garage sales and also swap clothes and shoes with your friends and family. Have a Saturday afternoon party where you invite everyone to bring five items of clothing or five pairs of shoes to swap. It doesn't matter about the cost of the item, if it fits and the other person wants to swap, deal done. You could also swap children's clothes and shoes, books, small appliances and all sorts of odds and ends.

But that is getting off the subject, that is un-shopping and this is budgeting. Before I get onto that though I want to encourage you to think about your need to shop, what you get from it, what it takes from you and if, like me, you are shopping for more than you need. If you are, I suggest you stop shopping altogether for a period of time and then go back to it when you have more control.

So, now that you've starting tracking your expenses you need to look at what you've got. Let's say you've been tracking for a month and you notice a pattern of coffees emerging. Most times you go out you buy a coffee costing $3. Do that four times a week and you've spent $12 on something you didn't need. Continue on for 48 weeks of the year and you'll be almost $600 out of pocket. That is $600 for coffee you didn't need or could have made at home. Imagine if someone came up to you in the street and said they'd give you $600 to stop drinking coffee at a coffee shop all year. You'd jump at the chance. What's that you say? You don't drink coffee. Well, make the coffee some small thing you do like - magazines, renting movies, newspapers, bottled water, buying lunch at work or whatever. It all adds up.

If you are buying that coffee and maybe a magazine and a rental movie each week, thrown in a couple of work lunches and some bottled water or Coke and you'd be looking at $2000 a year. If you are earning $50,000 a year, that $2,000 is quite a big chunk out of your pay.

But how do we get around the fact that we live in a modern world, we want to live well and sometimes that costs money? You reorganise your mind to accept the fact that you only buy what you have budgeted for.

I use a ziplock bag system for organising myself and our money. It works really well for me because when it comes to money I'm a bit of a dunderhead and I need to have a simple method that shows me clearly what I have to spend, and on what. Basically, we have two lots of money: one lot is for our fixed expenses like phone, electricity, gas, internet, rates, insurance bills, all that money stays in the bank. Our other money is cash money that we withdraw from the bank to buy our groceries, petrol, garden supplies, chook and dog food, etc. Here is the breakdown of our current budget, I've written in depth about it here:

(Per month)
Each bill is paid by direct debit when it comes in or kept in the bank until we need it

House and water rates 95.00
Insurance - house, car, health 225.00
Phone - Landline & Mobile 40.00
Internet 40.00
Electricity 53.00
Gas 15.00
Rego, tyres and maintenance 84.00
Vitamins 80.00
Clothes and shoes 20.00
Optical 25.00
TOTAL $677.00

Money withdrawn from bank and put in ziplocks

Aldi 125.00
IGA and markets 125.00
Chook and Dogs Foods 50.00
Bulk food/ flour 40.00
TOTAL $340.00

Petrol 150.00
TOTAL 150.00

Dental 20.00
Medical 25.00
Chemist 30.00
TOTAL $75.00

Garden Supplies 30.00
Pocket Money - HH & RH 80.00
Postage 15.00
TOTAL $125.00

TOTAL MONTHLY SPENDING $1367.00 or $342 a week or $49 a day

You will see that we have budgeted $80 a month for pocket money. We each get $40 a month to do whatever we want with. This is a little gesture that lets a bit of the pressure off. We can spend our money on what we love or we can save it - it's our own decision.

You will also see that we have no debt - so there are no mortgage or credit card payments. We try to live on the lowest amount we can and if we do that, the pay off for us is that we continue to live the lives we want to live. We don't have to go to work. Quite frankly we could both still work for pay if we wanted to. I still get offers to go back to my writing work, Hanno is still fit enough to work if he wanted to. We don't want to. We prefer to have the freedom of our days. We want to stay as we are.

Obviously your budget will look different to mine, but the structure of it could be the same. You will have certain bills that you know will come in every month or week that must be paid. If you set up a bill paying or have a direct payment system at your bank, this money can sit int he bank until the bill comes in and then it is paid directly from the bank. You don't have to touch the money at all. Then you need to make up a list of the cash expenses you have - you will withdraw this money from the bank each week, or each month, depending on your circumstances.

An important element of this type of system, is to have an emergency fund (EF). Things go wrong. No matter how careful you are, there will be points along the way when, out of the blue, you'll need money for something unexpected. To cover these times, make one of your categories for saving an emergency fund. If you can cover your unexpected expenses with cash you have already put aside, you won't have to put such things on your credit card. We try to keep our emergency fund between $1,000 and $2,000, but it goes up and down all the time. The most important thing is to save for your emergencies and don't see your emergency fund as a little bank that you can borrow from. When it's in the EF, it stays there for a real emergency.

We try to keep under budget for everything during the month. Everything left over - if we budget for $100 but only spend $70 - on every category, that money goes into our emergency fund. That is how we save for emergencies. It is the incentive we need to try to stay under budget in every category, except our pocket money. Generally, we have about $100 month left over. That money is put into a special account for the EF.

It's not all straight forward, is it. Budgeting requires a lot from you. You'll need strength of character, commitment and determination to succeed. It's difficult, I'll be the first to tell you that, but if you get this right, if you can knuckle down, control yourself and your money and understand your motivation to buy, you will be able to live well on little, and really enjoy the life and the satisfaction you'll get by being independent and having enough. I know what 'enough' is for me, have you worked that out for yourself yet?

Tomorrow I'll continue with budgeting. I hope I haven't put too many of you off. It's an important subject.

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