Wednesday, 8th February 2012 - 0 Comments
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In the parent article I mentioned that my advice would be unconventional and controversial. This is definitely the case with my approach to budgeting. If you believe you have the discipline to follow a plan like this, then you will reap many benefits. Be warned though, it won't be easy!
Budgeting and reducing your outgoings are the two quickest ways to increase your personal profit. Your outgoings will consist of regular payments, such as a mortgage, energy bills, rent, car loan, gym subscription, TV package, magazine subscription etc and then one-off payments such as furniture purchases, restaurant bills, video games, clothes and shoes etc. Some of these will be absolutely essential to your survival, including food bills. Many are not. TV packages and expensive clothes are good examples. Budgeting is about cleverly reducing your outgoings so that you increase your personal profit, which will later fund your investments.
Budgeting is very simple. It requires nothing more than an hour of your time and a computer. The basic premise is to make a list of all your current outgoings, both monthly payments and one-off, in a table with headings: Outgoing, Frequency, Cost, Annual Cost, Subtotal and then finally total up your annual costs at the end.
The next step is to determine the items that you do not need. My advice is to eliminate all commercial subscriptions immediately. By this I mean expensive mobile phone contracts, magazine subscriptions, TV packages and gym subscriptions. We will find ways of replacing these in time. For now, you will need to save the money. Another area to drastically reduce spending is in the habitual daily coffees or pint after work. I have personally given up coffee and alcohol, so can attest to the myriad of benefits, on top of the financial savings. Let's calculate how much this might save:
Assuming a mobile phone contract of £50 a month, magazine subscription costs of £50 a year, TV and gym subscription each costing £50 a month, each working day coffee at £2.75 x 2 a day plus £75 in alcohol a month (those pints and bottles of wine add up), this will save you: (50*12) + 50 + (50*12) + (50*12) + (2.75*2*5*48) + (75*12) = £4,070 a year (£340 a month). Assuming perfect inflation/interest rate matching (a bad but workable assumption), you will save £122,000 over 30 years. You will likely get an average of about 5% real return on any investments, so the total amount will be much more. This is the power of budgeting.
Now we will look at some common one-off payments. Clothes, video games, cinema, restaurants, concerts all add up. Assuming you could cut £100 on clothes per month, a new video game once a month (£50), cinema once a month (£15 in London with food!), restaurants (£60 once a month), maybe a concert every 3 months (£60). Amount spent: (100+50+15+60)*12 + (60*4) = £2,940 a year (£245 a month). That is about £88,000 over 30 years (again, perfect inflation/interest rate matching).
That leads to a 30 year saving of £210,000. Again, the true cost is much higher as you will be able to get a much better return on this capital. This post alone should make you realise why so many people are not wealthy. It's because they spend money on items they do not really need rather than investing it in assets which would generate a yield and help them become wealthy.