This is the most important financial lesson without which all other lessons are meaningless — it’s time to get to know your own money, find out where it’s leaking, and keep more of it in your hands.
At the extremes, we’ve heard of two types of people — those who somehow, without even knowing how, managed to spend large amounts of money, and those who, despite not earning much, seem to navigate the financial side of life without much stress or uncertainty. What fundamentally sets them apart? Character? Life path? Environmental influence? Perhaps all of the above, but the biggest difference is likely that one knows how to budget, and the other doesn’t.
Many people don’t know how to budget simply because they reject the idea outright. Maybe it’s even in the word itself… “budget” sounds restrictive, like a chore that will ultimately just stop us from enjoying life and the money we’ve honestly earned! It actually sounds a bit like a “diet” — we know that dieting can help us lose excess weight and improve our health, but we still struggle to commit to it because… it’s hard, and it denies us pleasure!
If you’re looking for advice on how to stick to a diet, you’ll have to look elsewhere, but here we’ll talk about how to stick to a budget — because budgeting can truly be a pleasure, not a sacrifice!
If you prefer, don’t even call it a “budget” — call it a “spending plan” (sounds better, right?).
But why budget at all? Without turning this into a text trying to convince you to start budgeting, let’s just say this: budgeting is the most important financial lesson — everything else can come later. Without a budget or a “spending plan,” it’s very hard to achieve goals, plan for the future, or recover financially.
Even if you have a lot of money, you still need a budget — the only reason you wouldn’t is if you truly don’t care that your money is “leaking” without your knowledge (and that happens to both the rich and the poor!).
Think about it — how many companies do you think budget? Almost all of them. And those that don’t (perhaps some small businesses) are most often heading for failure. Now, how many people do you know who budget? Probably far fewer, even though the principle is basically the same… for a company to survive in a cutthroat financial world, it must keep track of its budget. So how can an individual expect to survive — let alone succeed — in life without doing the same?
Chances are pretty high that you don’t keep a personal or family budget either — or you manage it “in your head.” That’s better than nothing, but a “mental” budget can end up costing you a lot, because, unfortunately, your head isn’t as reliable as paper…
In times like these — with rising inflation and general financial uncertainty — maybe this is the perfect moment to start a better, more serious budget.
Shall we try? Let’s go! We’ll start, of course, with bills.
Many people shy away from budgeting, claiming they don’t even know exactly how much they earn — which is often the case if you don’t have a fixed salary, but work hourly, by output, or by project… but that doesn’t matter, because budgeting isn’t about how much you earn — it’s about how much you spend. The key question your budget must answer is: where is my money going?
So — bills. You surely have fixed monthly bills that generally don’t change. List them as best you can. In a notebook, create a section called “fixed expenses” and start writing them down. You can go from largest to smallest, or in the order they are due — it doesn’t matter. These include rent, utilities, phone and internet bills, etc.
If you pay via online banking, your bank almost certainly has a mobile or web app where you can review your payments from the last month or another period — you might even find some fixed expenses you initially forgot about (which is why budgeting “in your head” isn’t smart!).
What else are your fixed expenses? These are your essential monthly costs. They may not be strictly “fixed” in amount, but it’s important to have a rough idea of how much you spend on food, medicine, and similar items.
The best way to start might be on, say, July 1st, and begin tracking everything you spend. How? Simply — every time you buy something, keep the receipt. Then, later — at the end of the day or on weekends (I personally recommend every day, because a lot of receipts pile up by the weekend!) — sort each receipt into a category. For example: “food,” “gas,” “transport,” etc.
Once you’ve completed these regular monthly expenses, it’s time to start planning for variable expenses — those that aren’t fixed but can still be part of your monthly spending. For example: birthday gifts (is someone’s birthday coming up?), haircuts (once a month? Less often?), clothes and shoes (maybe it’s time to refresh your wardrobe?), travel, entertainment…
We list these in the “variable expenses” section for two reasons. First, as the name implies, they vary month to month. Second, if you run out of money (which you may have already started worrying about the moment we mentioned “travel and entertainment”), these expenses are the easiest to eliminate.
It’s important to know which part of your budget “hurts” when money is tight. Ideally, it should be entertainment. If you’re short on cash, stay home over the weekend, or skip that new shirt (you probably already have a few good ones!).
A budget is not a law carved in stone. It’s a record that helps you control your money — but also more than that. Over time, budgeting will teach you discipline, which is crucial when it comes to finances! And it doesn’t have to be a bad thing — in fact, having real control over your money is essential for individual well-being.
Once you have all the relevant numbers written down (on paper or digitally, perhaps in an Excel spreadsheet), you can apply them practically in your daily life. How? Look at the worst month of the year — when your income is lowest. Then compare that with your spending. Ideally, of course, income should exceed expenses. If that’s the case — congratulations! And what about the “extra” money you didn’t spend? Don’t rush to use it up before the month ends! Save it — it will come in handy later (see here: Personal Fund for “Rainy Days”), or try to invest it wisely.
If your expenses are higher than your income, then only two options exist — either increase income or decrease expenses! The first is often difficult, but the second is usually much easier — provided you know where and how you’re spending. And for that, you need: a budget.
How to cut expenses? There are many ways once you know where your money is going. The easiest way is to create a maximally optimized budget — or as we’ve been saying: a spending plan! That way, you only spend what you’ve already planned to. For example, if you decide not to buy coffee every morning next month, you could save a few hundred kunas by the end of the month.
Finally, a budget is a “weapon” that protects you from perhaps the greatest danger in modern personal finance — spending money you don’t actually have!
The goal is to “get to know” your own money, because — although this may sound silly — most people haven’t done that. Money is treated as something that just comes and goes without order, goal, or plan… and that’s fine if someone enjoys that, but most people complain they don’t have enough money, that they’re always short… yet budgeting is completely free. All you need is a notebook and a pen!
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