When you start personal budgeting, it is common to find your personal expenses totaling more than your income. That’s OK, provided you are ready to make adjustments and changes. You will either workout to increase your income or make adjustments to your expenses until your budget balances. Even though both options are viable, the later probably would be the quickest and easiest option to take.
However, whichever option you’ll choose, managing your personal expenses from the start is critical to the success of your personal budget. You’ll need to analyze, categorize and prioritize your expenses. That way, you’ll be able to easily make changes and do adjustments in your budget.
Why Personal Budgeting Often Fails
The reason people have so much trouble handling their expenses is because they have no idea what their expenses really are. Infact, some of the reasons as to why budgeting often fails are:
- Failure to prioritize expenses
- Failure to budget for discretionary expenses
- Failure to include weekly, quarterly, or annual expenses
- Failure to plan for the unexpected expenses
So, how do you effectively manage your expenses?
1. Start by Listing All your Monthly Expenses Plus the Following:
- Weekly, Quarterly or Annual – Although most expenses are monthly, some are weekly, quarterly or yearly. Transform the weekly expenses into monthly by multiplying by 4 and divide annual and quarterly expenses by 12 and 3 respectively to calculate a monthly figure for your budget. If these expenses are not due this month, add these funds to savings and pay them when they are due.
- Discretionary expenses – These expenses are part of your normal out-of pocket expenses, things that you typically buy that you could live without but chances are you will not. Failure to budget for these expenses is one of the top budget busters.
- Unexpected expenses(Emergencies) – No matter how meticulously we prepare our budget, there will always be expenses which will arise that we had not factored in. Therefore, include an amount for building an emergency (reserve) fund for such expenses.
You may also want to read this article: Retirement Planning: Why Save And Invest For The Future
2. Categorize your Expenses for Easier Management
For easy management of your expenses through the budget, I recommend you divide your household expenses into:
- Fixed expenses – these include expenses that remain unchanged every month such as house rent or mortgage, loan repayments, insurance premiums etc.
- Variable expenses – these expenses fluctuate depending on household needs, time of the year, health, economic conditions and other factors. Such expenses include items such as food, clothing, utility bills etc.
- Discretionary expenses – as I told you earlier, these are expenses for things you can live without but chances are you will not.
Why Categorize The Expenses Into Fixed, Variable and Discretionary Expenses?
This way you’ll find it easy to manage your expenses properly and when you want to make changes or adjustments in your spending, you’ll know which expense category to go after. Mostly, you’ll find that it’s the variable and discretionary expense categories that will be involved in balancing the budget.
One more thing, I almost forgot. You should carefully monitor how these two categories are doing i.e. the variable and discretionary; they are infamous for undermining people’s efforts to live by their budgets.
3. Prioritize Expenses
It’s very important to prioritize your expenses. Start from the top priority (these should include expenses that you can’t do without), medium priority and low priority. Discretionary expenses should be in the low priority group. Okay! I know the ‘good stuffs’ are in this category but as I said earlier, they can ruin your budget if not handled cautiously.