You cannot control your income, but you can control your expenses. This live-within-your-means is the best financial advice you will ever receive. And one that will save you from many financial problems and overall stress in the future. In this blog, I give some general tips around this one piece of advice.
Make Your Monthly and Annual Budgets
A budget is a plan. You need to start by planning how you will spend your money in the next month. You cannot manage something that is not written down. So write down your plan. I recommend writing your monthly and annual budgets in Excel since it does all the needed calculations and groupings. Start by writing your income that you expect to receive next month. Income should be written with a positive sign, and expenses should be written with a negative sign. The expenses can go in broad categories like Rent, Utility Bills, Education, Grocery, Eating Out, Misc, Savings, Installments, etc.
Once done, a quick summation of this entire column will reveal whether overall, you are in the positive or the negative for the month. Positive is good as it means that your income is more than your collective expenses. And negative is bad because it means that your expenses are more than your income.
If you are in the positive then a broad grouping of expenses will be fine but if you are in the negative or too close to being in the negative then more detailed categories would be needed e.g. Utility Bills can be broken into Gas, Electricity, Phone etc.
Once you have written the budget in a single column for the entire month, copy/paste the column to have the budget for the remaining 12 months. Now you have a single column for each month with the same heads for income and expenses. Add/Edit some expenses/income which is quarterly or annual e.g. Bonus, Quarterly School Fees, etc. E.g. if School Fees are expected in March, then they should be added in March.
Now the budget for the entire year is in front of you. Again, a simple summation (but this time for the entire year) would reveal whether you are in the positive or negative for the entire year. You would also be able to see which of the months are going to be heavy and you might be going in the negative in those months.
If annually you are in the positive but in some months due to quarterly expenses you fall in the negative then mark those months and make a plan for them. If you are in the negative both on a month-on-month basis and annual then you would need some serious adjustments.
Record Your Expenses As They Happen
In the Excel file create a separate sheet to record the expenses as they happen during the month. For each expense make sure to mention the ‘Expense Category’ which should be linked to the name of the expense in your monthly/annual budget sheet. This linking of the expenses with your budget will allow you to improve your budget planning.
If you are in the negative
If you are in the negative, meaning your expenses are greater than your income, then you are in the red which means that you would need to make some serious adjustments. The goal is to make your expenses less than your income. Remember, that reducing your expenses is much easier than increasing your income. Depending upon how serious the situation is you might need to seriously think about lifestyle changes and/or having difficult conversations with those around you. Some expenses need to be reduced and some need to be dropped altogether. Take your family and your kids in confidence and set the right expectations for them about money and expenses. You would find this conversation difficult initially but very liberating once you have had it. Cutting your expenses does not mean that you should not try to increase your income. It is always good to have multiple income streams or get a salary increment or bonus etc. But again, that is hardly under your control. You cannot as easily increase your income as you can decrease your expenses. So focus more on cutting down your expenses.
Also while multiple income streams might be a good idea it means more work and effort, which may have a negative impact on your health and family life.
Similarly avoid going into needless investments like buying property or paying installments for a bigger car, if that is going to take you into the negative OR bring your expenses close to your income. As a rule of thumb you should have at least 6 months of your monthly expenses before you start thinking about investments.
In conclusion under no circumstances allow your expenses to pass your income. Have a healthy gap between your income and expenses since you would need to account for inflation and other unforeseen expenses. Also the closer your expenses start moving towards your income, the more needless mental strain you are inviting onto yourself.
Delegate The Expense Heads
If the monthly/annual budgeting and expense recording exercise sounds like too much work for you, then you can always delegate the expense heads amongst your family. E.g. Grocery and Domestic Expenses go to your wife. Tuition Fees, Transport, and Pocket Money go to your children. Etc.
Delegation would not only free up your mind but also make your children more responsible. Task them on preparing the budget for their expense head, negotiating it with you, and then recording the expenses. If the kids are responsible enough you can even give the entire budgeted amount at the beginning of the month. Think Twice about Fixed Expenses
Fixed Expenses do not change over the period. E.g. Rent, School Fees, etc are fixed expenses. Think twice before introducing a fixed expense in your budget. Because there is no way you would be able to control or reduce this expense for the month or year. This includes car installments, property investments, etc. No matter what you do, you cannot get out of your Fixed Expenses.
Include Sadqa as your Budget Expense
Include Sadqa (Charity) as an expense in your budget sheet. If you are in the negative reduce your other expenses to make way for it. If you are just in the positive, then add a very small amount but do add it. And if you are substantially in the positive then allocate a percentage of your total income as Charity.
A good way to decide on the amount or percentage that you would disperse monthly as Sadqa is to see which number bothers you just a little. E.g. if you earn 5,000 dollars a month, ask yourself whether 5 dollars a month as Sadqa bothers you or not. If not, start increasing it till you reach an amount that starts bothering you a little. Suppose that amount is 100 dollars which is 2% of your income. Reduce that by just a little e.g. 90 or 95 and start giving it as Charity every month. Over the months you would find that you are feeling okay about the 95 dollars and it is not bothering you anymore. Time to increase that amount by just a little that it starts to bother you. 😊 If you still have a healthy gap between your income and expense start increasing the amount till the point that it starts to just bother you.
Start dispersing Sadqa at the beginning of the month. If you do not support a charitable cause where you can send the entire amount at the beginning of the month, then just keep the amount separately and be on the lookout for any worthy causes during the month and disperse the amount immediately when you come across it.
Having a planned/budgeted amount, even if it is as little as 1 or 5 dollars would put you on the path of availing the numerous benefits of charity, which I would discuss in another blog.
Include Savings as your Budgeted Expense
Another important expense that is not an expense but something you need to plan is your ‘Savings’ or ‘Investments’. Initially, your savings target should be to save as much as 6 months of your most important expenses. Once that ‘Savings’ amount is available then start to reserve an amount that you invest in long-term assets. Investment is a topic that I would probably cover in another blog but over here just consider reviewing how much amount you can reserve in the ‘Investments’ expense category.
One reason that I am calling ‘Investment’ as an ‘Expense’ is because you should not be thinking about pulling your money out of your investments, which means that the amount reserved for investment should be forgotten for the next 3-5 years. Envelopes
This is an age-old expense/budget management exercise. And I am sure most of you are already aware of it. The idea is to divide your income in separate envelopes corresponding with each expense head that you have defined in your budget.
If making envelopes is too old a practice for you, then check with your bank whether they have something called virtual accounts or ‘Saving Plans’. This allows you to create linked accounts with your main account and at the start of the month either automatically or manually you can move your income into these accounts. So whatever remains in your main account is so low that you stop having any ideas that might lead you towards impulse buying. Stay away from impulse buying.
A fat bank balance might provoke you to buy things that you don’t need. If you are moving your income into different accounts and investments, in the end, you might not have enough money remaining in your account to give you funny ideas about changing your mobile phone or buying a new accessory for your car.
Whenever you need to buy something ask the questions ‘Do I actually need this?’ or ‘Do I have something similar’, ‘How is it going to help me?’. This would put a block between you and the salesman throwing his pitches. Think before you buy! Conclusion
This might not be an exhaustive list of advice that covers everything. I do realize that everyone has their own unique circumstances and lifestyles. But these tips have helped me a lot over the years. Feel free to share any ideas and suggestions in the comments section.