The Importance of a Budget

Spend less than you earn and invest the rest.

You can read every book in the world on finances but if you don’t have any spare money at the end of the month, your knowledge is useless.

Since about May 2019 I have put together all my expenses together on a spreadsheet. It can work out how much you spend per year, per month, per week and even per day. This basic spreadsheet was taken from Andrew Craig (How to own the world).

After years of poor money management, my personal finances were all over the place. I ended up with a spreadsheet for expenses, car information, tax information on DUFFY ELECTRICAL, tax information on my rental properties and now DUFF PROPERTIES and a few more thrown in.

What has been a good habit is to check my spreadsheets once a week. It only takes 5 minutes and just means I am on top of my personal finances.

This weekly habit has encouraged me to improve my property management skills as I am fully aware of my legal obligations and key dates like when I need Gas certs or Electrical certs.

Nothing about personal finance is easy and I have found taking the time to sit and work through my budget to be very difficult. Due to a complete lack of focus on my expenses I didn’t really know where my money used to go.

Instead of using some basic intelligence and looking at my expenses further, I carried on regardless and just sort of knew what was going out. This went on for years and I never bothered to work out my budget until mid-2019 as a 36-year old.

What forced me to sit and go through my budget was that I had finally got some much-needed clarity. My goals were massively important to me and I knew that to get my financial house in order, I needed a budget.

With my budget in-place, it allowed me to ensure I was spending less than I earned. Then I was able to put money aside each month in the investments I had been researching.

If you are like me, your goals will be reason enough to sit and go through the arduous task of working through your personal finance budget.

If you do some research, it will help you from a concept point of view to understand your assets and liabilities. You will fully understand your income and expenses.

With knowledge of Assets, Liabilities, Income and Expenses, you will have a clear picture of your financial situation. Now this is clear, you now know what you need to do to get to where you want to be.

This initial budget has now given you the opportunity to do some financial planning. You might have a loan that is preventing you from investing into an ISA or SIPP.

What if you could manage with 1 car and bike to work. By selling the car you don’t need, you could pay off the loan.

Now you have no loan repayments and you are saving on fuel, insurance and car tax. This could mean you are now able to put £300 pcm into an ISA or SIPP.

The following hypothetical example John will use a low-cost index fund and we will call it ‘RETIRE AT 57’. We will assume he manages to average 7% interest per year over the next 27 years. There are no guarantees in the stock market, and I am not a qualified FA.

We are going to imagine that John is a 30-year old who now has an effective budget. He has decided to manage on 1 car and now has £300pcm to invest. He is going to invest every month in the ‘RETIRE AT 57’ low-cost index fund and will invest for 27 years.

Now because of John’s budget, he has been able to invest in a pension fund when previously he had no pension. With a little Financial Literacy, he was also capable of choosing his low-cost index fund.

With all the hard work done, we are going to see what his work does for him. At 57, John has a SIPP that has a value of £268,141. He was on a path towards no pension that would have affected him and his family in his late 50s.

Now all of a sudden, he is happy in his late 50s because of some intelligent investing decisions he made as a 30-year old.

This is just one example of how improving your budget skills can help you. The 27 years might seem like an eternity but from my experience, there are no get rich quick schemes when it comes to personal finance.

 

 

Leave a Reply