Monday, April 8, 2013

How to do a basic budget and have an emergency account

I see so many people who screw up their finances. And I do understand why. When I first met Mr G, I had no clue about money or saving or budgeting. He gave me a lot of help, and now I'm all over it. But I suspect that working full-time would have done that to me regardless of his influence. What I don't understand, is how people can manage without having a budget or an emergency bank account.
Emergency accounts are the most important thing to me. They rescue you when you need them, and they prevent you from having to ask others for cash or from having to dodge bills.

1. Open a bank account that doesn't have a card attached.
2.  Automatically have $10 a week taken out of your regular account and put in your new account. If you get paid fortnightly, have $20 a fortnight taken out.

Now you have an emergency account!

And note, it's for emergencies.  It's not for when you realise you really want a new book/DVD/pair of jeans. It's not to buy someone a gift or to go out for dinner when someone asks. None of those things are emergencies.  It's not even for when you get halfway through the week and realise you blew your food money. If that happens, eat leftovers. You probably have some dried pasta. Stick some cheese on it. Buy a loaf of bread and some honey and suffer for a few days. A lack of delicious meals is not an emergency.

But of course, this is assuming that you even have a food budget. You might want a house or you might want a partner (and yes, that is a valid reason for getting your finances in order - being a financial disaster isn't sexy, and it's worse the older you get).

1. Work out how much you earn per week.
2. Deduct how much you pay in rent. If you don't pay rent then pretend that you do, and divert that money into your savings.
3. Deduct food money. $80-100 per week is what I would say is fair.
4. Deduct bill money. I include my water, electricity and my phone. If I had health insurance, it would include this as well.  I don't have an internet connection because... I have chosen to give myself more spending money per week.
5. Give yourself some weekly spending money. I think $100 is fair. This lets you go out and buy stuff you want within reason. If you want something that costs $100, then it forces you to think about how much you want it. Is it worth doing nothing else all week?
6. Now comes the best part.  After you have deducted all of those things, you may have some money left over from your original weekly wage. If so, that's rad, and that goes to your savings accounts . If not, then you need to readjust everything. You may need to reduce your weekly spending money. Eat cheaper foods, and make sure you always eat home cooked meals for breakfast, lunch and dinner rather than getting takeaway.
7. Under no circumstances should you get overly excited and attempt to save heaps by restricting your food and your fun money. Budgeting is just like losing weight. If you restrict yourself too heavily you will eventually snap and spend like crazy - saying to yourself 'I deserve it'. Also, your life will be crap. You'll be eating 2 minute noodles by yourself every night, which isn't exactly ideal.

Now let's get onto the part about savings accounts. Let's assume that you've now got somewhere between $40-400 left over for your savings.

My preference is to break that up even further. If you are just starting to save, I'd put half into an emergency account, a quarter into a holiday account and a quarter into a 'me' account. I know this might not make immediate sense, but budgeting is about making finances easier so that life is nicer.

I love having a holiday account. It means that at some stage, I can take a real stress free holiday without having to worry about how I pay for it. I know a woman who took a $10000 loan to finance a holiday. She hated it, because she thought about money the entire time.  If I want to go to New Zealand rather than country Victoria, then I need to save more and wait longer.

The 'me' account is more indulgent. It's for large, selfish purchases.  I only put $10 a week into mine, so that when Christmas comes around I can buy something for my family, and also buy a treat for myself. Since we are now doing a Kris Kringle thing for my immediate family, it's unlikely that I'd blow the entire $520. So I'd also use it for whatever else I'd like throughout the year that I couldn't afford with my weekly saving.

Once those accounts get to a reasonably healthy amount (say $1000 each), then you can continue kicking a low amount each week into them, and start a new account for something big - if that's what you want.

Now I'm hungry and depressed about how much I hate Christmas so we'll finish here.  Next time I might talk about debt. Because I've become fun like that.