Budgeting is an important part of everyday life, but sadly, many younger generations are not taught the skills needed to budget effectively. Truth be told, the older generations weren’t taught how to budget either.
Unfortunately, this means some will find it all too easy to overspend each month, drawing on additional credit sources and generally applying for a more substantial loan than what they really need.
Technology Brings Financial Challenges
The heavily digitized nature of finance exacerbates this situation in the 2020s. For the younger generation, the reality is they rarely see or handle “physical cash.” They haven’t visited their bank or felt their wallet getting lighter at the end of the month.
Instead, money is just numbers on a screen, and it doesn’t hold the same tangible meaning to a financially inexperienced generation.
I know first hand of several young adults in their 20s that live inside their credit card overdraft because it’s “free credit.” This credit is perpetually borrowed, and they are content to pay off the minimum repayment each month to stay within their limit.
The fact that this has become part of their normal comfort zone could very easily result in a real mess as they progress through life. Unexpected emergencies with no extra borrowing cushion available and the prospect of missed monthly repayments, thereby permanently damaging your credit score and affecting your lifelong borrowing prospects, are real potent risks.
So why not get your financial life in shape in 2021?
Financial Changes Start With The Four Pillars
This doesn’t just apply to the younger generation, the four pillars of financial literacy (more on what these are here) is a core life skill that significant numbers of people were never properly taught either in school or by family.
It is never too late to start a budget and plan your finances!
You do not need an accountant to do this. All you need is an honest and open outlook. You need to start by embracing all of your financial comings and goings, however difficult it is to face any debts that you have accumulated.
Creating A Budget
So, open a blank spreadsheet on your computer and bring the last six months of bank account statements with you. You may want to use highlighters or colorful pens to help you identify what the purchases are on these bank statements.
Look at how you spend your money and the pattern of this throughout the month. Do you overspend at the start of the month on frivolous items? Do you overspend on your morning coffee on your way to work every morning?
The next thing that you should do is create a budget template. There are a plethora of these available for free online. Here is one example of many, but we like the Wonga one as it gives you a very clear breakdown of expenditures.
It breaks it down into 12 categories for you, which includes:
- Your monthly housing budget
- Your monthly food budget
- Your monthly transportation budget
- Your monthly personal care budget
- Your monthly pet-care budget
- Your monthly insurance budget
- Your monthly budget for taxes
- Your monthly for existing loan payments
- Your monthly legal payments
- Your monthly budget for gifts and donations
- Your monthly budget for savings and investments
- Your monthly entertainment budget
On this specific budget template, each category is further broken down, which really allows you to get into the nitty-gritty of your finances.
Personal Finance Is Personal
Every budget template is slightly different, and you may even want to create your own, which suits how you like to visualize your finances. Perhaps you could make the data into a graph if you are a visual person, so you can get an accurate idea of what takes up the most of your money. There are also pie charts or line graphs that could track your spending over time.
The trick here really is, to be honest – any areas that you mark down or calculate wrongly are just going to make things more difficult for you overall. It is a personal document, so make sure you create it how you want and in a way that helps you the most. You will also want to password protect this document for confidentiality!
Due to lockdown or COVID 19 restrictions, it may appear that you haven’t spent money in your ‘usual’ pattern, so you may also want to look at statements from further back. This will offer a true reflection of your spending when shops and entertainment venues were open and your regular spending habits.
These are known as variable expenses.
Budgeting For Variable And Essential Expenses
Money Fit explains that variable costs may include clothing, fuel, recreational expenses, personal care, and entertainment. They say that these are the areas you have the most control over, as they are not essential costs.
For instance, you might choose to walk to work once a week rather than spend money on public transport or fuel. You can change the amount each month.
When it comes to your essential costs, these may appear to be more ‘fixed,’ but you might be able to negotiate them.
For instance, your mortgage payment – you may be able to contact your lender to refinance your mortgage loan, spread it out over more years, or reduce the interest rate entirely so that less money is being spent each month on this expense.
Your energy bills are similar and could be easier to switch than you think. Energy companies are very competitive and depending on where you live, it may be easy to change your plan to a better one that sees less money coming out of your account each month. Some energy also install smart meters so you can keep better track of your budget.
Ultimately, your finances are changeable, and if you find yourself in a hole financially, it is best to address this issue head-on, create a budget and force yourself to change old habits.
What better time to start this than right now?