This will be an opportunity to define what a budget is and why you should care about it. First, I will discuss the concept of income and then get to the heart of the matter of expenses. I will then give you all our advice on how to control your finances, the first step in building and developing your assets.
What is a budget?
In accounting terms, a budget is a summary of projected income and expenses. In concrete terms, it is the difference between the income you receive and all your expenses. Often ignored, I will show you that it is the first step in the constitution and development of your patrimony.
Why manage your budget ?
First of all, having a better management of your budget will allow you to limit certain disappointments. The goal is to avoid :
- overdrafts on your current account
- additional bank charges related to direct debit refusals
- oppositions on credit lines
Indeed, all of these costs, when added together, can have serious consequences on your daily life. Controlling your budget means above all avoiding the stress of not paying your bills or not being able to treat yourself. This organization is the gateway to building your capital.
A good balance of your finances will allow you to put money aside every month. This amount can then be allocated to finance one or more projects, on a short, medium or long term basis. If ever the need for capital is urgent or too far away to wait for the funds, especially to buy a property, it will always be possible to borrow this amount from a bank.
Moreover, in wealth management, the credit remains a real leverage effect, which allows you to release a substantial amount of money in the short term.
Obtaining Income
Now, let’s focus on the different parts of your budget and their distribution for a better management. As we saw in the introduction, the budget is the difference between your income and your expenses. Your income is the salary, wages or pension you receive each month. But it can also be income from your assets, such as property income for example, or certain public benefits such as family allowances.
Income is therefore the basis of a budget, it is your purchasing power and your ability to save. Because before wanting to earn more, it is important to ask yourself certain questions:
- do my expenses allow me today to achieve my future plans?
- Am I living beyond my means?
Control your expenses
To answer this question, let’s get into the details of these expenses that impact your budget.
The different types of expenses
There are 3 types of expenses :
- those that are fixed, that you pay periodically, every month, every year
- those that can vary from month to month, such as your leisure activities, food shopping, etc.
- those that are exceptional, anticipated or not.
Take stock of your expenses
The first piece of advice I can give you is to take stock of your finances. Take the time to analyze your bank accounts and make a list of all your recurring expenses. Go back a year if you have to, to note what you pay every month, every year, or from time to time. But keep track of those amounts that will come up sooner or later.
Monthlyize expenses that are not
In order to better organize your budget, our second tip can be to monthlyize all the expenses that are not. You are bound to have expenses throughout the year that you don’t pay every month.
We are talking about:
- vacations
- subscriptions paid in one go
- or even your housing or property tax.
The idea is to force monthly payments in two ways, either you can pay your expenses directly, for example the payment of your property tax which can be spread out. Either you force yourself to put aside 1/12 of an annual expense every month. For example, if you owe €1,200 in September, it will be easier to put aside €100 every month starting in October than to pay €1,200 all at once.
Controlling your budget also means treating yourself, so don’t hesitate to budget for leisure activities.
For example, decide on an annual sum dedicated to your vacations and in order not to impact your budget too much, plan to put this sum aside every month. This solution will allow you to enjoy yourself without feeling guilty during your vacations.
Planning different types of expenses and spreading them out over time allows you to manage the budgets of the following months and you don’t take the risk of ending up in the red.
Allocating expenses
Now that you have done this work, it is time to take stock. Compare what you earn per month to your monthly expenses, this amount should include the future payments you have budgeted. If the result is negative or close to 0, either you are living beyond your means or your future expenses are excessive. On the other hand, if the result is positive, the sum freed up can be used to finance a future project or to set up savings.
However, is the distribution between your various expenditure items balanced?
As far as distribution is concerned, there are several rules, and today we will look at the 50/30/20 rule. If you take a base of 100, which corresponds to your monthly income. The ideal is to have 50% dedicated to your fixed expenses, 30% to your variable expenses and 20% to your savings.
Ideally 50% of your income should be dedicated to your fixed expenses. This corresponds to all your bills (taxes, insurance, subscriptions) and everything related to your home (rent or your monthly credit payment). In any case, you may have noticed that in reality, it is often difficult to rent your main residence or to borrow to buy it if you don’t earn 3 times the rent or 3 times the credit payment.
Secondly, 30% of your income should be spent on your variable expenses. These are the daily payments that change from month to month. These are your leisure activities, your outings, but also your food shopping or the fuel for your car.
Finally, the remaining 20% is dedicated to savings! This percentage is the starting point in the constitution of an estate without loans. Because without the ability to save, and therefore without the ability to put money aside, it will be complicated to develop your assets.
These amounts are not fixed, of course, and they can be adapted to each person’s situation. However, you should know that the further away you are from these amounts, the more complicated it will be to finance your projects and develop your assets.
Review your expenses
Now, 3 observations can be made.
- The first: your situation is perfect, your income meets your needs and your expenses are well distributed.
- The second: your expenses are not well distributed and you are not able to generate a suitable percentage of savings.
- The third: nothing is going well, your income is not enough to pay your expenses.
In all cases, you can try to find a way to get additional income. But before that, wouldn’t it be more interesting to start by looking for a way to reduce your expenses?
The questions to ask yourself are varied.
About your home, for example:
- How much of my expenses are related to my home?
- Would owning instead of renting save me money?
- And if I already own my home, will renegotiating my loan allow me to reduce my monthly payments?
The idea here is to review most of your expenses and optimize their costs.
You will find, for example, many simulators on the internet that allow you to compare prices between different products:
- insurance
- energy suppliers,
- …
Look also at your subscriptions, today we have a wide choice of possible subscription such as:
- gym,
- magazine,
- telephone,
- internet,
- music,
- streaming,
- delivery of packages or various boxes,
- …
Try to assess the use of each of these subscriptions and think about the usefulness of keeping them according to the real use you make of them.
Finally, if you pay too much tax, it would be interesting to try to reduce it.
Anticipate your future expenses as much as possible so that you can save money every month. I strongly encourage you to look at your accounts regularly and check the good correlation with your budget. Finally, these rules are not set in stone, they can be adapted to everyone. Trying to follow them is already a first step in the constitution and development of your wealth.