Fast forward. It is now a week after your payday. You walk around the office. Be it any field you work in, I am quite sure you hear a very familiar type of groan.
“I can’t believe it’s all gone..”
“I wish it was payday already..”
“Where did it all go?”
Now, you can choose to live like this, between paydays. But, there are other options! Laura Portolese Dias and Amit J. Shah have written an excellent chapter on managing personal finances in their book Intruduction to Business. Let’s look at how, if you borrow a bit from the business world, you can also choose to stop your money from controlling you, and take control of it instead!
A business measures its cash flows by its revenue and expenses. However, to maintain a steady amount of cash, it needs to prepare for upcoming expenses, as they are not usually the same every month. This is done by budgeting. Okay, but what does this have to do with your empty bank account?
Take your salary first. How much is it per month? Does it fluctuate? Can you estimate the amount of bonuses and other additional payments you might be getting? Then, do you have any other source of income? Tax return? Dividends? Interest from long-term savings accounts? Take all of these and estimate your cash flow for each month.
Colin Barrow states in his book, Financial Management for the Small Business, that a personal budget is divided into essential and non-essential items. However, if you have not done a personal budget before, it might be a bit hazy what essential costs you have and what you could leave out. This is why it is important to first do a bit of research on your own expenses.
A company has fixed costs, which stay the same each month. It also has variable costs, which differ according to how much the company produces items, buys them to sell and so on. You, probably, don’t exactly produce anything, but you should still be able to map out your expenses. Easiest step is figuring out fixed expenses, and estimate how they affect you each month. If you for example pay your electricity bill or your car insurance every three months, or twice per year, those months will have slightly higher expenses, which you can prepare for beforehand if you have some idea of how much it will be. Usually your insurance amount or electricity remains the same for a year, making it easier to estimate how much the next bill will be.
Knowing your costs helps to prepare, but you might still find your pockets empty too soon after a payday. This is why it’s good to also take a look at your spending, even if just for a short period of time. For this, you can take the role of an accountant and simply save your receipts and later on record what you bought and how much it cost. If you don’t get a receipt, write it down and put it in your “books” when you get home. For the actual bookkeeping you can use pen and paper, you can use Excel, or if you own a smartphone, there are also handy apps available for this purpose. The most important thing is that you choose something that you feel comfortable using, otherwise you’ll record your expenses for a week or two before getting fed up, and that is not enough to fully analyze what you use your money on.
(Next, a handy app for tracking one’s expenses)
When you have at least a few months of records, you can start playing the Controller of your own life. Do your food costs seem reasonable? If not, you can start figuring out why. Are you easily enticed by treats you were not supposed to buy? Do you often find your cart full even though you only went to get some milk? Then you might find help in making a strict list of what to get and sticking to it. Another, perhaps more extreme, but also more efficient way, is to decide on the amount you are going to use before going into the shop. Then keep a calculator or your phone handy and jot down every single price. If it goes over your set limit, too bad, you have to let something go. This helps you figure out what you really need and what is unnecessary. Repeat with any other changing costs, like clothes, household items , gas..
The set costs we mentioned earlier, are also not set in stone, even if they seem so at first glance. When you have a good idea on what your insurance costs you, you can always ask a few other insurance companies if they would have a better offer for you. Car costs going over the roof? Maybe it’s time to switch to something more affordable.
If the above ways of control seem to difficult and you would rather just buy what you please, but still have money left, you can turn your attention to your income. Decide on an amount you will set aside every month, or on the months when you don’t have a huge bill coming.
Is it worth the bother? You will be the judge of that. These are merely some tools to help you avoid the post pay day woes. And who knows, maybe this year your personal business will make a hefty profit, and you can finally take that trip to somewhere warm during the winter!
Next time, we’ll take a look on managing your debts. Stay tuned!