Personal Finance & Budgeting

Budgeting involves maintaining control over your expenditures. There are three phases that makes up a perfect budget.

  • Defining – Defining your inflows and outflows to get an idea of your cash flow.
  • Setting – Setting your budget to control how much your expenses are each month.
  • Improving – Improving your cash flows by reducing your expenses and increasing your income.

Making a budget

Write out your total income

Include wages, salaries, rent collections, settlements, allowances, or any other source of money you get.

Write out your fixed costs

These are the expenses that come in bill form like insurance, car payments, rent or mortgage payments, or payments to any other kind of loan. Costs like these need to be paid and don’t change no matter how much or little you use them. It is important to get these down first, since these payments are generally out of your control.

Write out your variable costs

After you pay your bills, you can now allocate what’s left of your income to other things that need to be paid. Groceries, utility bills, and other costs within your control go here.


Monthly income

  • Primary employment: £1600

Fixed monthly expenses

  • Rent / Mortgage: £300
  • Car payment: £336
  • Phone: £55
  • Train: £50
  • Insurance: £80

Variable monthly expenses

  • Gas: £80
  • Cigarettes: £150

The basic budget

Budgets don’t have to be painful experiences. Now that you have a set of realistic goals for all of the money you will be getting and that you have an idea of how much money you will be spending, you can start to budget effectively.

For the first month, just count the ins and outs. You can use a normal notepad for this.

Example (All amounts in £)
August 2005 income
Income (job) 4,095
August 2005 expenses
Rent 1000
Insurances 300
Food 200
Entertainment 100
Clothes/Diapers 100
Phone 98
Train 50
Credit Card 43
Gasoline 40
Gas 34
Electricity 20
Mysteriously Vanishing Money 165
Total Expenses 2,150
Leftover cash from July 820
Leftover cash from August 520

In August, they had £820 in addition to £4,095 from their income for a total of £4,915 .

They spent £2,150 and had £520 left at the end of the month. They therefore saved £2,245 in August.

Counting the leftover cash in your wallet allows for a precise expenses count even if you forgot to actually count an item or two. The forgotten cash will show up as Mysteriously Vanishing Money (MVM).

Savings were distributed according to the priorities set out in Chapter 1 and were as follows:

House 700
Tuition 545
Retirement 500
Car 400
Travel 100

In case of unforeseeable emergencies when expenses exceed income, they use their travel money first, then the car money and then the retirement money to pull them out of the scrape. This is not recommended. In fact, an extra savings account for emergencies should ideally be created and hold about 6 months worth of income to deal with the unforeseeables

A family must prioritize their needs and perhaps create a tighter budget.

The revised budget

Now that you’ve thought about how to cut your expenses, it’s time to get to it! Some expenses of course are fixed and so cannot be easily cut. In the example below, rental fees are exorbitant but reducing them would entail moving elsewhere… Not a realistic solution. So, what can be cut? Food, ET and the phone bill look like prime targets. Another important one to hit is MVM as it usually represents items which you can do without… after all, you don’t remember buying them! Utilities and gasoline are already quite low, so don’t need to be taken care of. Gradual cuts may be better than taking out 50% of one item in one fell stroke and suffering through the entire month, only to face the uncontrollable urge to splurge on that item next month. Perhaps cuts of 10% a month would be easier to bear.

August 2005 income Target budget
Income (job) 4,095 4,095
August 2005 expenses Target budget
Rent 1,000 1,000
Insurances 300 300
Food 200 180
Entertainment 100 90
Clothes/Diapers 100 85
Phone 98 88
Train 50 50
Credit card 43 43
Gasoline 40 40
Gas 34 34
Electricity 20 20
Mysteriously vanishing money 165 150
Total expenses 2,150 2,080
Leftover cash from July 820
Leftover cash from August 520

Hey, not bad! You have shaved £70 from your budget. That’s a great start. Continue doing this every month until you feel you are living *too* cheaply and yearn for a better life. Then, loosen up a little… just a little! Just enough to feel the difference between extreme poverty and the point where you enjoy life again. So, enjoy life, but on the cheap side!