There are a few key lessons to learn when growing up: how to change a tire, how voting works, drink too much, and you will get a hangover; but perhaps most important of all, how to create a household budget.
Knowing the ins and out of managing your bank accounts in and outs will lay a strong financial foundation for the rest of your life. You need to track your spending, prioritise your needs, pay off debts, and plan for the future. It might sound complicated, but it’s easier than it looks.
Work Out Your Income
To start, you’ll want to list your income sources. For most, there is one primary source: your job. However, any regular income sources should be listed. Overtime pay or the odd job on the side don’t count, as they’re inherently unreliable.
For the self-employed, where monthly incomes can fluctuate, take the average of a few months and use that as the figure. It may even be worth underestimating, that way you’re sure to be in the black.
What are Your Expenses?
There are two ways of increasing your money; the first is to make more, the second is to spend less. You’ve established how much is coming in, now list the regular outgoings: bills, rent, mortgage, Netflix, internet, utilities. These are your essentials.
Next up, move to the regular luxuries. Do you always go out for lunch on a Friday, or get take-out on a Saturday? How much do you spend on beer or coffee? Be honest. If you want to get an accurate picture, use bank or credit card statements.
Finally, add the two numbers together; these are your monthly expenses.
Calculate Your Net Income
The next step is easy, minus your expenses from your income. Hopefully, the number at the end is positive. If so, you should be saving money. If you’re not, then you may need to go back and recalculate your expenses. Are there any missing or hidden monetary leaks?
However, if you’re in the negative, you’re gradually building up debt. In the long-term, this can lead to some severe problems.
Tweak Your Expenses
If you’re heading into debt, you will need to find ways to cut your spending down or raise your income. Whereas, for some, they will need to boost the amount of money they’re saving every month. Perhaps you’re trying to get a deposit together for a house, or you need a new car.
Either way, take a look at the luxury items. Do you need to drink so much? Can you bring down your food bill? But it’s also useful to shop around for the cheapest utilities. Many people are paying more than necessary, simply because they don’t check.
Track Your Spending
The most important lesson going forward is to keep track. That way, you won’t get any unpleasant surprises. As time goes by, you’ll get better at tracking every dime. Plus, it’s pretty satisfying when you’ve built up a decent amount of savings to act as a safety net, or when you finally start paying off your debts.