The typical scenario
Everyone wants to do the best they can with their money, but the best most people achieve is far less than they would like. It is very unlikely that you have ever met anyone who deliberately placed themselves in financial difficulties, yet most people have experienced them at some stage in their life.
Budgeting is a way that you can take control of your money and ensure that you not only live within your means, but you also achieve the most you can with what you earn. Without a budget you need to be either extremely lucky to avoid having money problems or an endless supply that will never run out.
If you think about how little you were taught in school about money management, you can understand how the lack of information could be an issue. Schools, Colleges and Universities tend to focus on qualifications for a job or career, but take for granted that you already know how to manage the income that you will generate. Our society just seems to assume that when you enter the workforce you will instinctively be able to manage your finances! In fact most people actually get worse at managing money once they start work and have an income of their own.
Prior to our first job, we have very few financial commitments because we have little or no income or money to spend! Then our first pay cheque comes and it is our pleasant task to decide what to do with all of the money. Somehow it all gets spent, and so it is just as well that Friday comes around and the next pay arrives.
It doesn't take long to get used to this new found financial freedom, and with only our own needs and desires to fulfil, it is quite easy to manage. We tend to learn a "pay to pay" method of budgeting. When the money is gone we wait till the next payday and then start spending again!
Problems begin to emerge when we begin to accumulate more and more financial commitments. When we meet our partner and start a family it gets worse as there are then more people's needs and desires to be satisfied. We have car repayments, insurance, registration expenses, telephone bills, loan repayments, electricity bills - and the list goes on.
Unfortunately most of these expenses don't fall due on a "pay to pay" basis, but we have become used to managing this way. We begin to experience financial difficulties but don't really know how to do a lot about it because we were never taught how! As the money begins to get tight, a savings account for bills seems like a good idea, but this strategy on its own generally fails to solve the problems.
Interestingly, when you ask most people what causes their money problems they blame the lack of income - their boss doesn't pay them enough for the work they do! Undoubtedly, maximising earnings is an important part of achieving financial success, but unfortunately it is much easier to spend money than it is to earn it, so we also need to focus on how to make the most of what we do earn.
How do you know when?
The lack of self-discipline is acknowledged as a major cause of money problems. In plain terms, a lack of financial self-discipline means spending money when you know you should not. However this raises the question - How do you know when you should not spend money?
- Do you rely on feelings? e.g. "I feel like I've spent enough money for one day"!
- Do you stop spending when your savings account is empty?
- Do you know it is time to stop when your credit card gets declined?
These may seem like silly questions, but they are actually very crucial ones. How do you know for sure when you can afford that little bargain you found at the shop? How do you know for sure that you should pass it by? For that matter how do you know if or when you can afford the bigger bargain you found - such as a new car?
One of the most frustrating things about money is that it is so hard to earn, but so easy to spend and while you can't ruin your financial future by earning too much; you can certainly ruin it by spending too much! At the moment, when you see something that catches your eye, you suddenly feel a rush of adrenalin, you feel excited about the possibility of buying it and you wonder if you just might be able to have it right now! Your emotions begin to take hold and you have to make a decision. Where does self-discipline fit into the equation? If you use self-discipline and say No! you might be wrong. Maybe you can afford it but you don't know! Perhaps self-discipline really isn't what is needed after all.
Imagine it is the weekend and you have decided to go for a flight in a light aircraft. The pilot has taken you high up to enjoy the breathtaking views. Everything is going well and you're wondering why you hadn't done this years ago, when suddenly the pilot has a heart attack and dies! Suddenly you have a problem! It's even worse than a money problem. You certainly don't want to die!
Can you use self-discipline to land the plane safely?
You could sit there and apply all of the self-discipline in the world, but it would not help solve your problem. What you need is information. Information about how to use the radio and what all the gauges, knobs, levers and buttons are for. Most importantly you need information about how to land the plane. (Of course experience would be a big help as well).
When making financial decisions you need to have as much information as possible to assist you in making decisions about whether or not to spend money.
Such information might be:-
- Your level of income - how much money you earn.
- Your current financial position - how much money you have.
The fact that so many people struggle with money suggests that these two are not enough and that more information is needed!
Simply Budgets is able to supply a third ‘key' piece of information that makes use of an individual's regular living expenses, bills, the age and replacement value of your possessions and savings needs. It is able to tell you: How much you need to have at any given point in time and how to catch up any shortfall. It is able to identify what funds are available for investment so that you can take control of your future rather than live from "pay to pay". It's like having a crystal ball on your bank account. When you have the right information it is much easier to plan and get things right and the need for self-discipline is greatly reduced.
Take your first step towards financial freedom today. Don't neglect this important area of your life any longer. Be proactive, take control and enjoy peace of mind. Buy learning to budget, you will no longer spend more than you earn. Find out more about this excellent budgeting software Simply Budgets or see a professional and invest in your family and your future.
Kent McDonald, Director, Active Money Solutions (07 3878 2496)
Hot Tips!
- Be honest with yourself. If you know you are not good with money, obtain help from a mentor, a bookkeeper or a financial adviser.
- Start budgeting this week. Find a method or program that works for you.
- Budgeting is not just accounting for the past and present but planning for the future.
- Spend less than you earn.
- Live off 80% of your income and earnings. Invest the balance into a retirement/savings plan and into helping humankind.
- Understand that it is not the lack of money that causes most domestic financial problems but how you manage your money.
- Don't rely on your feelings when it comes to spending money and avoid compulsive spending.
- Pay the full amount off your credit card every month. If you can't, you have overspent.
- You can't ruin your financial future by earning too much but you can ruin it by spending too much.
- Managing money is more about information than about discipline.
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