Budgeting for a better future, Part 1 with Olav Nielsen from PocketSmith
Control where your money is going by setting a budget
Here’s a question for you: do you know where your finances are at right now? What about where you’ll be in 6 months, or a year? Would your answer be a guess, or do you have a clear method for predicting this?
Most people don’t, but knowing exactly where your finances are at offers you the unique ability to make truly informed decisions about your everyday spending. Ignoring your financial situation can be blissful, but the bliss is only temporary and more likely to cause you to miss out on what could be.
To begin with, ‘finance’ is a broad term. I’ll focus on one of the more actionable areas of personal finance, which is in understanding where your money is going, and how to control your spending by setting a budget.
Why budgeting offers you power and control
Budgeting is about taking control of the money you spend on daily activities in order to achieve a greater purpose. It is not about missing out on things you want, but instead, it is about being clear about what you really want in life and how to get there. Your money is your power, so don’t squander it!
Knowing whether you can afford the thing in front of you can either make you feel great about buying it or empower you to choose not to buy it. It’s empowering because you’re conscious of what you choose to afford in the context of your long-term plans.
This is a power that can be had via a simple budgeting technique that I will outline in this article.
You may be surprised at what difference savings can make over time just from small changes to your habits. So when you create a meaningful budget and keep track of it, you get the power to connect your daily activities to your long-term plans, such as saving to buy your first home.
Start by understanding your spending
So let’s get into this. Before you start budgeting, it is very helpful to have a look at what you already do. Think of this as understanding what your ‘default settings’ are.
The best way to do this is to look at your recent spending. A sample over the last 3 months will give you a good overview of your own habits.
Look at your transactions and choose a set of categories to sort them into. Your categories can be as general or as fine-grained as you like. For example, they could be Food, Rent, Electricity, Coffees, Clothes, and more.
The important thing here is that they make sense to you. There are a number of ways of analysing your transactions. Sometimes your online banking app will have categorised your transactions for you. You can also download them to a spreadsheet and sort them there.
I work at PocketSmith, which exists to make all of this simpler. PocketSmith automatically downloads my bank transactions from all of my bank accounts and gives me a continuous, consolidated analysis of my financial position. You too can use PocketSmith to create your budgets and forecast your account balances up to 30 years into the future. You can learn more about PocketSmith here, and we have an offer for you down below.
If you have printed out your transactions on paper, you may want to get some coloured highlighter pens to help you order your list. As digital transactions are readily available though, using some form of technology (be it a spreadsheet or PocketSmith) will be cheaper and more useful in the long run than pen and paper.
Once you have got your transactions sorted into your chosen categories, add up the total amount spent in each. If you have 3 months’ worth of transactions, divide by 3 to see your monthly expenditure.
Is it what you were expecting? These categories are your default budgets. It is what you are currently doing, whether planned or not.
Take a moment to reflect on your current spending, and congratulations! You’ve taken the first step towards financial control. You now know a fact about your finances at this point.
In the next segment, I’ll explain how to create a meaningful budget.
Over the coming months, we will publish more tips and advice on how to manage your personal finances to reach your goals.
Take a read of part 2, Creating a meaningful budget
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July 23, 2018 Blog