By Iacovos Iacovides, The Sports Financial Literacy Academy, APC Sports Consulting, Nicosia, Cyprus
The term budgeting tends to put people off and is usually associated with restrictive spending.
Actually, having a budget is the first and possibly most important step in getting your finances in order and establishing the foundations for your long-term financial well-being.
Another common misconception is that people with higher salaries – such as athletes—do not need a budget.
The reality of it is, if you are prone to overspending, it does not matter how much you make; if anything, higher salaries are harder to calibrate in terms of spending. After all, a budget is nothing more than a summary of your expected income and expenses for a period of time, usually a month or a year.
The first thing you need to do is gather any financial documents that relate to your income and expenses, such as monthly salary, rent and grocery bills.
The second step is to divide these into the income and expenses columns.
Expenses need to be further divided into two categories: fixed and variable expenses. Fixed expenses will be more or less the same each month and include things such as rent and insurance payments. Variable expenses cover things like groceries and entertainment.
The third step is to calculate total income and total expenses. If your income is higher than your expenses, then we are off to a good start. If, on the other hand, your expenses outweigh your income, then you will need to do a bit of adjusting.
This is where the variable expenses subcategory comes in. It is much easier to revise variable expenses than either fixed expenses or income since one would involve things like renegotiating rent and the other finding new sources of income. It is by no means impossible, in the medium and long term, but highly improbable in the short-term. The goal is to bring your income on a par with your expenses.
Ideally, you will have also accounted for both savings and investment money. In other words, make sure that you designate a portion of your salary for investment purposes and another for savings. They should be placed under your expenses category.
If all this sounds a bit confusing, we have a few questions that might help you contextualize everything:
So far, we have covered the question where am I financially? This is the question that your first draft budget answers.
The next thing to ask is where do I want to be financially over an X period of time?
Here, you will need to incorporate your short-term and long-term goals into the process. For example, I want to buy a new car by the end of the year and my own apartment over the next 5 years. That means that you need to include in your savings both of these things.
To do that, you need to ask yourself how do I get there?
In order to get to the right answer, you might need to do a bit of trial-and-error. Test your budget for a couple of months and see if it is realistic and then reconsider or make your final adjustments.
It should be mentioned that your budget items will change as your income grows.
If you are at the first stages of your career, it might be unrealistic to have three types of savings – for emergencies, for your financial goals and for retirement – and at the same time set money aside for investing. You might want to start with your emergency savings and financial goals and then build from there.
Nonetheless, having a budget is vital. It helps you to understand where you are financially, determine if you need to make any changes and, most importantly, set the right foundations for your financial future!