Hi everyone, this week I am going to cover the importance of drawing up and sticking to a budget. This is the next step that I personally took, when I was trying to get my finances on track. It is very simple and very rewarding process in terms of achieving your financial goals.

If you have read last week’s blog, you should now know the importance of keeping track of your financial comings and goings (Financial Log). However, this step alone is not enough. This is only the first step of the recover process. Once you have kept track of your expenses for a period of time the next step is to study and understand your spending habits. This is very important. For example, in my own case after I tracked my expenses for a period of one month, I noticed that I was spending a lot of money on food (take-aways, coffees, donuts etc.), car (fuel, maintenance etc.), utilities & bills (rent, electricity, gas etc.) and sport (gym membership, soccer fees, gym clothes etc.) as well as other small random things (Miscellaneous). Therefore, I decided to breakdown all of my expenses into these 5 categories (more on this later in the blog). There are several advantages to this:

  1. You can manage your expenses much better when they are broken down into 5 different categories
  2. You can deal with one category at the time when trying to cut down on costs
  3. Helps you understand how much money is going into a particular category
  4. It helps you to draft a concise and accurate budget plan

The last benefit of keeping a Financial Log is where this week’s blog is heading towards – Budgeting. I am sure all of you are familiar with some sort of a budgeting method. Governments, companies, households etc. all use some type of a budgeting system to forecast their financial status. So if most companies, households and governments are using some sort of a budget system, what makes you so special? A budget can be drafted for any type of cash flows. Personal budgets are very important on the road to financial recovery.

Now this is where the “Categories” system comes in. By separating your expenses into 5/6 different categories, the next step is to allocate a sum of money that you think you will spend on this category in the coming month. (I draft my budget on a monthly basis as I find it easier to manage, however, budgets can be drafted on a weekly basis also if you find this works for you). I draft my budgets on my beloved Excel. However, I first scribble down my estimations for the coming month on a piece of paper after some serious thought, before committing to excel file (I sound very dramatic, I know). Again, if you don’t like Excel or cannot use excel you can always stick to your piece of paper, notebook, phone etc.  As long as you are happy with your method of keeping record of your budget then that is the method that is perfect for you. Shown below is an example of a typical Budget layout, categories and method that I personally use (Although figures are inaccurate as this was only used for demonstration).

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The steps to take when drafting your own budget are described below to help anyone out with starting out:

  1. Compress all of your expenses into 5-6 categories (you can have more than 5/6, but no more than 8. The more categories you have the harder it is to manage)
  2. Stick that kettle on and lets dive in.
  3. Under each category write down all of the expenses that you think you may have in the coming month. Make sure to spend some time completing this step. You need to try and think of every possible expense with an estimated value of such expense for every category.
  4. Just in case you add additional small sum of money to every category in order to cover any unplanned expenses. (i.e. you predicted you going to spend €500 on groceries in the coming month, now add another €50 on top of that estimation and that will give you some breathing room if any unplanned expenses pop up)
  5. Tally up all your predicted expenses for each category and input them into your excel file ( I keep my Financial Log and Budget breakdown all in one Excel file, makes it easier to manage all of my financial needs in one place. You can either keep it all on one Sheet in Excel or add a separate sheet for better organisation).
  6. Before you put your laptop away and pat yourself on the back for a job well done, consider your income for the coming month. There is no point planning total expenses to a tune of €2,500 if your income is €800 (Extreme example, I know, but you get the point). If your projected expenses go beyond your projected income, then you need to trim your budget down to bare essentials in order to stay within your financial means. Cut down on coffees, take-aways etc.
  7. The last step is the most important one – STICK TO YOUR BUDGET. No point spending time and effort drafting a very pretty budget if you just going to ignore it. Be realistic in your estimations and be honest in your predictions. Refer to your Financial Log in order to help you plan for the coming month

Using my financial log at the end of the month I add up all my expenses and populate my totals into my well drafter Budget (if I say so myself) for each category and see if I was able to stick to y predicted total. Some months I would spend more and some months I would spend less than my predicted amount, but recently I have gotten so good with my budget that I am only every €5-€10 over or under at the end of the month for each category. This is also partly due to the fact that I learn from the mistakes I have made every month and keep them in mind when drafting my next months budget. It will take time to master the budget side of things but, I think its one of the most vital steps you can take in order to get your finances back on track.

The main thing when it comes to budgeting is to be honest with yourself. If you don’t reach your “unrealistic” budget goals at the end of the month just because you put yourself under pressure for the sake of your Excel file looking pretty, then this will result in you being frustrated, angry and discouraged. Soon you will feel that you are going nowhere and not progressing and this whole “I WILL get my finances on track” attitude will be thrown out the window. We don’t want that. We love progress and we love achieving goals. So set a realistic goal for yourself and stick to it. You will feel (although my not have) like a million dollars when all your categories are balanced at the end of the month and you have some extra cash in your pocket.

Now you may be confused as to how you can accurately predict your expenses a month in advance. Well this is where your “Financial Log” becomes your star player. By tracking your expenses for a period of one month you should have a fair idea as to what expenses you think you will have for the coming month. Of course, expenses fluctuated from month to month and it is hard to predict with 100% accuracy, but you should be able to predict it with 85-90% accuracy if you are honest with yourself and keep your financial log up to date.

Having a well thought out and well drafted budget allows you to plan ahead in terms of expenses as well as plan ahead in terms of how much money you should have saved in the coming month and this money can be put towards pension, health insurance, holidays, college, that Gucci Bag you always wanted or whatever else your heart desires. Budget is your window into you future financial status. Starting off it may be a little bit difficult to stick to your budget, but that is completely normal. It will take time to perfect your ability to draft and stick to a budget. Money managent does require time and effort but that time and effort make you feel like this:

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The fact of the matter is, you will never master your budgeting skills unless you put pen to paper and start. Starting off is always the hardest part. If you are a serious about managing your money, you will find the time in your day to sit down and draft a proper budget. There is no point rushing or fooling yourself doing this. Remember, no one else benefit or suffers from your decisions but YOU. If you care about your financial future, open that notebook/Excel/Phone etc. and start scribbling down.

That’s all for this week folks. If you have any questions on the blog or anything else in the world of finance, please feel free to engage in the conversation with other readers and myself via the comment section. You can also follow me on twitter (@McevoyVadim) for some additional financial tips and tricks.  In addition, you can contact me personally via my email vadim.mcevoy@gmail.com.

Thanks for reading, I welcome any feedback and talk to you guys on the next one.

46 Comments

  1. Very good blog. What would you say would be most important to try and cut out if you can that really adds up
    without you realising?

    Like

    1. Hi Shannon,

      It really depends on what is your biggest expense. You wont know this until you start your own financial log.
      For me its my car and food. I try to cut down my costs in those two categories the most. I can always cycle/walk more and I can always buy cheaper food and cook more. But that’s just me.
      Everyone has areas where they can cut down their cost. You just have to find yours and you will only do that if you start your own financial log.
      Hope the above helps.
      Thanks.

      Liked by 1 person

    1. Hi James,

      You can draft your budget using a simple notebook. Drafting a budget is simply writing down your predictions of your expenses for the coming month. Anywhere you can write it down and keep track of it then that is the method you can use. I just use Excel because I am very comfortable with Excel. I have used it a lot in college.
      Buy a notebook from any stationery store and use that as your personal finance tracker with your Financial Log and Budget all in one place.

      Hope the above helps James.

      Like

  2. I would find it hard to keep track of 5 different categories .. What would be the 2/3 most important or how would you break it down into 3 categories?

    Like

    1. Hi Tony,

      You are right, some people may not have that many expenses so its hard to break it down. If I had to break down my expenses into 3 categories I would say:
      1. Food
      2. Bills & Utilities
      3. Miscellaneous (Use this category for any random things you buy that vary from month to month.

      The above is just my opinion. I don’t know your financial situation and what expenses you may have but the above are the 3 critical categories.

      Hope this helps Tony. Hope you are enjoying the blog.

      Liked by 1 person

      1. Yeah that makes it easier because I find when you aren’t using excell it is more time consuming to use 5 categories rather then 3. Thank you for that I will try that and see if it works better for me.

        Like

  3. Tried your excell idea last week and it is working out good so far but I won’t feel the real benefits of it til a few months down the line.

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    1. Alisha,

      Journey to Financial Freedom is a marathon not a sprint. Don’t get discouraged. Just keep take it a day at the time and it will be all worth it in the end.

      Glad you are putting some of my ideas into practice. Hope its going well for you.

      Liked by 1 person

      1. Alisha,

        Next blog is going to be more about my background and why I chose to start a blog. I have had some low points in my life financially and I just want to share more of my story.

        It will be posted next Monday. I will try and write more frequently in the coming weeks, but for now it will only be on a weekly basis. Apologies for any inconvenience.

        Thanks for your support..

        Like

    1. Maddie,

      I have been using the Excel method for over a year now. Went through a period of time using it on and off but have been trying to keep it up for just over a year now. It is tough to make it part of your daily routine but once you make that change you will feel that you are more aware of the money you are spending and begin to learn the true value of money.

      Liked by 1 person

      1. Would you constantly update your expenses every day or dedicate just one day a week to filling everything in?

        Like

      2. Hi Maddie,

        I usually do it every couple of days. I write down on my phone day to day what I spent money on and then sit down and update my Excel sheet every couple of days. It really depends.

        I found however, that the longer you go without updating your Financial Log properly the ore expenses you tend to leave out and forget. More frequent update = accuracy.

        Hope that helps.

        Like

  4. This blog is a very good follow up to your second blog. It explains it better because was not sure how to break the excell up into different areas. Going to give it another go. Great blog

    Liked by 1 person

    1. Lily,

      After been bad with my money management and my financial decisions for best part of my life I started studying the methods and tricks of money management few months ago and twisted those ideas to fit my life. As a result, I developed some new ideas and implemented them to my daily life.
      I was always very curious when it comes to money. I wanted to start a blog of some kind for many months, but was always too shy. I get a well deserved kick up the bum from my girlfriend that pushed me to share my views and experience when it comes to money management via this blog.
      I guess this blog wouldn’t exist without her and I am glad I listened to her and started this blog as it seems people are engaging with my views and opinions on a very delicate topic.
      Hope you are enjoying the blog.

      Liked by 1 person

      1. Half the battle is having a good support system behind you, so you are very lucky to find that in your other half, not many people can say they have that. Yes really enjoyed the last three blogs

        Liked by 1 person

    1. Hi Holly,

      This is certainly something that I will look into. In the meantime I was thinking off perhaps creating an Excel template for all the readers and posting it for everyone to download and use. If this is something that people want then please let me know.

      It seems a lot of people like the video idea so I must try and do something about that.

      Thanks for your feedback Holly.

      Like

      1. Yeah that sounds like a good idea just make an excell file when you haven’t done it before. I feel like you click a button and everything can disappear

        Like

    1. Hi Lucy,

      Try and write down your expenses as they happen on your phone and update your Excel file (or whatever method you have of tracking your expenses) that evening. Keep doing that until you get more into a routine of doing things.

      Don’t get discouraged. Every day is a new beginning so keep trying and do your best. It will take a little bit of time and effort but its definitely worth it.

      Hope that is of some help to you Lucy. Keep trying!

      Like

    1. Hi Aaron,

      Thank you very much for the feedback.

      Yes I agree with you and my next blog will be a little bit about myself and my story (I keep it brief dont worry, I wont bore all the readers to tears so be sure to come along and read it next week).

      Thanks for the support.

      Like

  5. I am your below average excell, word etc. type of user and I tried this last week and your steps were so well explained it was so easy to follow and do. Thank you

    Liked by 1 person

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