You must have savings if you are to invest and therefore, you must have some constraint over your spending. For most people, it is much easier to spend than to save. Since the previous statement is true, many people preach about the need for personal budgeting. Budgeting is a powerful tool not only for managing one’s spending habits, but also in planning and projecting one’s future.
Many sites and software programs are available to provide assistance when budgeting. In all honestly, if you have a spreadsheet program like Excel, then you have enough to start and build a solid foundation. In developing a budget I like to think of expenses that are fixed and those that are variable.
The more difficult an expense is to change month to month the more fixed it is. For example, the mortgage or rent you pay is a fixed expense. It could change, but would involve much more effort than buying a different mix of food products each month. The differentiation between fixed and variable expenses is more of an art than a science. When starting to budget, look at those items that you feel you have the power to change from month to month as a variable expenses, while other expenses fall into the fixed category.
After you’ve laid out the general expenses and classified them into their appropriate variable and fixed categories, it’s time to think about a few simple measurements. What does your rate of savings look like compared to your variable and fixed expenses? If you take your variable expenses and compare it to your monthly income, what does this look like? How can you change your variable expenses to paint a more acceptable picture?
Example: I make $1000 per month and I have $400 of variable expenses per month. Thus, (400/1000 = 40%) 40% of my monthly income would be allocated towards items that can be adjusted. This tells me that I have some power in moving away from the 40% level towards a lower range.
I would highly encourage anyone who does not have an idea of their monthly expenses to use the spreadsheet linked above to gain a better understanding of where their income is going and how they might be able to adjust their habits to achieve the rate of savings they desire.
Remember decisions made in the past do shape the direction of the future, but the future is not set in stone. Setting goals and priorities can help provide the structure necessary to reach your financial and investment goals.