If you have read and applied the points elaborated in the previous parts of this subject, then I believe your personal financial plans may be working better and achieving better goals for you, or at least challenging your perspective about money. Through these articles, I am trying to introduce you to the fundamental secrets of maximizing the value of your disposable income regardless of its quantum. Also, enjoying financial freedom is more dependent on prudent and sparring management of personal resources than augmentation in disposal income. The previous parts were purposed on explaining how to have the right perspective about money and some useful auxiliary methods through which wastage can be avoided. In principle, steering clear of wastage involves effective tracking of your income and expenditures; you may term this personal accounting. This part will delve more into personal resource accounting techniques that involve budgeting and reconciliation.
There are different styles to adapt that suit your personality in documenting and tracking your income and expenses. While some people are more comfortable with computer based software like Microsoft Excel and Word, others prefer using notepads on their tablets and cell phone devices to achieve this purpose. Equally, a greater number of individuals would rather maintain the traditional unsophisticated methods such as using diaries and notebooks for their personal accounting. Essentially, try and choose a method that most matches your personality and also handy for reference and adjustment. Nonetheless, I will recommend a computerized style of accounting as Excel preferably, to help in your analysis and safeguarding.
Similar to the method of choice, the periodicity can also be as a result of the discretion or convenience of the user. An important factor to be mindful of in choosing the period is the cycle of your income, thus, whether you receive your income on weekly, fortnightly or monthly basis. The periodicity of your budget should ideally align with your income cycle for consistency and effective matching. Considering the income cycle consciously in determining the time span for your budget cycle will make developing and reviewing your personal budget a lot easier.
Creating the budget
In developing personal budget, whereas with accounting or finance background you can be intentional about formats and presentability, the essential objective here is to sum up your estimated income and get the total of your expected expenses, and strike the difference between the two aggregates to get either your surplus or deficit for that period. Therefore be flexible and construct your budget in a manner that matches your understanding and usability. The vertical option involves listing all expected inflows and totaling them before doing same for projected expenditures directly underneath. The balance is then arrived at by subtracting the total budgeted expenditures from the total expected inflows. A major advantage about the vertical method is that it allows you to use the next column for the “actuals” and the one that follows the “variance”. The “actuals”, quite self-explanatory, represent the veritable incomes and expenditures for each line item stated on your budget and the “variance” is the difference between the budgeted and the actual amount of each line item. Hence, this style patently reveals the line items that result in income surplus or deficit in terms of incomes and those that show under or over expenditure on the expenditure segment.
Interpretation of the budget
The meaning of the variance of income is the inverse of the sense behind that of expenses. Whereas a negative income variance depicts positivity of actual income trumping projected income and a positive income variance reflects a shortfall in actual income in comparison with projected income, a negative expense variance portrays negativity of actual expenditure overrunning projected expenditure and a positive expense variance ideally shows a lesser actual expenditure than originally projected. It turns to hold that the convenience of an expense variance positively correlates with the sign it bears while the convenience of an income variance negatively correlates with its sign. Additionally, if the aggregate of the projected income is higher than the total of planned expenses, the resultant effect is a surplus and the reverse will produce a deficit. The ideal budget is the one that shows a surplus balance through using fairly accurate and realistic parameters for estimation. It is completely understandable for dependents whose sources of income are highly inconsistent to have deficit balanced budget. It is important to know the relationship between your budgeted and actual amounts.
The variance is the main parameter used to gauge how you are performing in keeping to your budget. From the table above, you will notice that there was a slight over spending in both January and February by $11 and $32 respectively. In the quest to overturn this deficit trend, you should review the line items to find where the overruns are originating from. Clearly, Miscellaneous is driving the situation with $20 overspending in January and February alike, followed by non-recurrent expenses. Your interventions should primarily occur in these two areas in order to reverse the situation, by either being more frugal in incurring miscellaneous and non-recurrent expenses or realistically increasing the budgeted amounts to close the gap. The latter option is recommended to be elected if there is no more room for cutting in actual expenditure. These efforts will positively improve the surplus position of the budget or reduce the deficit.
The ultimate goal for personal budgeting is to track your income and expenses in order to create periodic excesses or shrinking the shortfalls. The difference of greater importance is the one that is the resultant factor of actual income and expenses. If you consistently achieve higher surplus or lower deficit in the actual column than in the budget column, this may mean you are achieving your aim to cut down on your expenses. The exhibit depicts this trend with $285 surplus in January and $ $334 in February in the actual columns as compared to $250 in the budget column for each month. Also remarkable is the increase in the actual surplus from January to February of $49 showing a commitment to augment the surplus overtime.
Personal budgeting as one of the ways to guard personal resources against wastage is also helpful in keeping a sense of awareness of your money, keeping focus on your monetary goals, and gives you control and clear oversight of your resources, which ultimately results in a proper organization of your savings.