Reverse budgeting

So you have followed my blog until now. Let’s recap.

You know that saving is important, you understand what motivates you to spend The Psychology of Debt irrationally and you’ve learnt a few tips along the way about how to be smarter with your money and avoid rip-off shopping.

Mixed spending style

Now you need to approach the task of budgeting, but if you’ve never set up a budget before, and you have certain debit orders offset against overdraft, some cash shopping and the balance paid for on your credit card, you will not know what you are really spending. This mix of spending styles is detrimental to correct and managed budgeting.

This is where you could start the process of reverse budgeting to work towards better money management. To do this you will need to keep track of all your expenses in the next few months. This includes debit orders, cash and credit card payments.

Columns

Take all your receipts and costs and put them in columns such as car, household, cosmetics, food, data, etc. Add each column and then add the totals of all columns together to get a grand total. Subtract this number from your total revenue. If there is a positive balance, you do not need to despair. However if your expenditure exceeds your revenue, you could be on the way to creating a debt cycle and you need to stop at once.

Averages

The next step is to average your expenses for each month (over three months at least). Then look carefully at each column and ask yourself some hard questions. Look at each column and see if it can be cut, for example, did you really need that expensive shampoo, was that new pot plant absolutely essential?

See what happens as you eliminate more and more of these costs until it fits with your actual revenue.

Now you are ready to start a budget.

Allocate

Take your revenue and allocate expenses that are manageable, cover your needs and fit them into your budget. Prioritise each area so that if you need to cut, you do not cut essentials, ie food and medical costs are high priority items on your budget. If there’s any adjustment to be made, make them in household, cosmetics or data columns, making sure you can manage with less.

Once you have worked out a budget, think of it as your spending plan so that you feel empowered and not restrained as you go about managing your money.

 

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