The Tribune

BUDGETING is the single most important thing you should be doing right now to improve your financial situation. Have you ever got to the end of a week or month and asked yourself where all your money went?

A budget is the best way to answer that question. It is like doing a CSI-style forensic analysis on all your money flows.

Right now, you are most likely receiving and spending your money fairly routinely, and thus somewhat unconsciously. This is very common but not ideal. Even if you keep some sort of mental budget, taking the time to write down your monetary thoughts helps provide more clarity. Let me also state explicitly that a budget is not just for people with limited funds or who have problems managing money. It is also for people who have considerable resources, and for those who would be considered financial whizzes. In other words, it is a valuable tool for everyone.

The benefit of a budget is all in the details. Start with how much money you have coming in. Take the income from all of your sources over the course of the month and total it up. If you have a stable weekly pay cheque this is fairly straightforward. If your pay cheque is unpredictable, then track down your income for at least the last three months and use that monthly average to smooth out the volatility. As a back of the envelope bonus, if you divide that monthly income by four you should really consider some level under that amount as a hard limit on your weekly spending.

To get a complete picture, however, the next step is to figure out what your monthly expenses are and how they are distributed. We use monthly for expenses (and income) because most regularly occurring bills are charged every 30 days, and because most of us have numerous expenses but normally only one source of income. These facts make figuring out where all of your money goes the more involved portion of budgeting. An accurate sense of all the money you pay out regularly is critical.

Hopefully you have resisted the urge to trash all the bills you received in the past few months because you will need them. The recurring categories that affect most consumers are rent (or a mortgage); utilities; transportation; consumer debt (car, credit card); food; entertainment; and insurance. Examine the past several months and get a good average estimate of your spending in each category. Tally these up over the course of a month and make note of the expenses that stay relatively fixed over time versus those that fluctuate. The more variable expenses you have, the more discipline and focus will be required of you to control your cash flows.

If a blank sheet of paper and a calculator starts to get cumbersome, use Google Sheets or Microsoft Excel to enter your list of income and expenses as line items in a spreadsheet. Creating a budget using technology is certainly not necessary, but does add the advantages of easy flexibility and automatic recalculations whenever adjustments are necessary.

That brings us to the bottom line. The big reveal in our financial investigation is taking a look at the difference between your monthly income and your monthly expenses. The ultimate goal is to have your total expenses be less than your total income. If they are, that is fantastic. It is time to start thinking about accumulating savings and starting an emergency fund. If not, then it is time to take a hard look at some areas where you may be overspending - especially on any non-essential variable items.

Two categories to scrutinise if you are looking to provide immediate relief to your budget are food and entertainment. To be clear, cutting expenses does not require a vow of poverty and boredom. Saving some money by preparing a few more meals at home (especially lunch) is actually healthier and cheaper, and it is unlikely that the quality time you spend with your people will be destroyed if you skip an extra round of drinks. Another move is to use this opportunity to price check your expenses. It is quite possible you may be able to negotiate discounts as a valued customer, switch to a better, cheaper product by a competitor, or save money by cancelling an unused service. Make as many adjustments as you can to get your budget in balance.

A worthwhile rule of thumb for longer-term consideration is that your expenses become particularly burdensome if the combination of rent, utilities and transportation take up more than 60-65 per cent of your income. A yardstick has its limitations, but significant changes may be required of your lifestyle if you find yourself outside that range. Another good long-term budgeting habit is to check your income and expenses once a quarter. That is usually enough time for financial matters to settle comfortably or change materially.

Budgeting is not a chore. It is a choice. It is an opportunity to be proactive with your money instead of being reactive to it. The best thing is that, at its core, it is a simple affair of matching income and expenses. It is just a tool, like having a calculator when you need to do math. Use it to your advantage.

NB: Ramon Simms is a management professional with more than 10 years' experience in finance, operations and technology. He holds a BA in Financial Economics and an MBA in Entrepreneurship. He is a Managing Director at IFF Ltd (www.iffpros.com) Bahamas, and you can reach him at ramon@iffpros.com