x Abu Dhabi, UAEWednesday 17 January 2018

Anatomy of a budget

Tracking your expenses is rarely enjoyable. But understanding the truth of your spending habits can have significant rewards for the future.

What are all those slips of paper doing on your desk? You know, the one from that restaurant you splurged on last week and the bill for your child's tuition that you forgot to pay. You definitely need some order, a plan. And I don't mean stuffing all that paper into a shoebox. I know, you might have better things to do with your free time than draft a budget, and doing all that work could uncover some unpleasant surprises - you might find, for example, that you spend more than you earn, or that you spend too many of your hard-earned dirhams on frivolous things and are far behind on saving for retirement.

Yet tracking your expenses and cobbling together a spending plan is the foundation of your financial house. Armed with more self-knowledge, you can make better long-term decisions about your money, help lift yourself out of debt and make good on past mistakes. Living in blissful ignorance of your financial well-being is a workable short-term solution, but it won't help in the long run. Knowing the truth - and acting on it - is ultimately the most rewarding way to go.

So how do you get going? As a first step, you should make a forensic accounting of your spending for a week or two - or even a month, if you're feeling ambitious. You can't have a budget that reins in your spending, after all, if you don't know where your money goes. Save all your receipts, note down any expenses you incur for which you didn't get one, and pile together your bank and credit card statements. These items together should paint a detailed picture of who and what fetches most of your cash. They also may quickly unearth some extraneous expenses. Small purchases of Dh10 and Dh20, you will likely find, do add up.

How you continue to track your spending depends on your personality. If you're comfortable with spreadsheets and number-crunching, look to programmes like Quicken and MSN Money. Both offer useful budgeting tools and allow you to import bank and credit card statements, assuming your bank provides them. If you have investments or business expenses to manage, higher-priced versions of these programmes can help track those, too.

For the Luddites among you, another option is good old paper and pencil - or, more likely, a simple spreadsheet. You will be scrawling or typing in entries yourself, which might not be high on your list of fun things to do on the weekend. But it still does the trick, as long as you keep careful track of your cash. A third (and, for the moment, absolutely free) option is using one of a number of websites that have popped up in recent months that aggregate financial data retrieved directly from your bank and credit card providers. These sites, which include moneycenter.yodlee.com, mint.com and wesabe.com, do most of the work for you, categorising your expenses as they come in and sending you updates on your financial status every week or so. They even calculate your net worth for you, which is a good way to keep track of your financial health on a week-to-week basis. You are taking a slight security risk by giving away your bank login information - for example, sharing passwords and account numbers with a third party should never be taken lightly - but the sites listed above have so far proved to be safe, and the wealth of graphs, pie charts and spending records may well be worth the gamble.

Once you've decided on a reliable way to keep an eye on spending, you can move forward with crafting a budget. This part is relatively easy. Put down your monthly income (in a spreadhseet, computer program or online). Then, dice up your expenses into categories - think food, transportation, clothes, travel and the like - and come up with a reasonable budget for each that is based on your spending patterns. You can also now decide where you want to cut back, assuming you need to. If you found when you tracked your spending that you splurged on clothes, restaurants and jewellery, curtail budgets for those items accordingly. As you think through a budget that matches your income, don't forget to include once-a-year expenses that probably didn't show up when you tracked your expenses. If you take two trips to Europe every year, for example, you should account for that in your monthly budget. If you expect vacation bills for the year to total Dh20,000, you should be putting roughly Dh1,700 per month toward vacations in your budget.

Savings is another item that you should always account for. Most financial professionals advise keeping the equivalent of around three or four months' salary in an easy-to-access savings account or moneymarket fund, just in case you run into an unexpected expense - if your car suddenly requires a Dh4,000 transmission fix-up, for example. And of course don't forget to budget for retirement savings.

Once you have constructed a budget, your only remaining job is to stick to it. Some people don't have trouble with this task, and can keep tabs in their heads on whether they're reaching their limits in one category or another. If you're less gifted in the memory department, though, you can try other methods. A popular one that works for some people is acquiring envelopes, labeling them with your spending categories and putting cash in them. Withdraw from them during the month when you need the money.

Another method that is as effective as it is simple: withdraw all of the spending money in your budget for the month from an ATM. Then you know exactly what you can lay out on food, petrol and other everyday expenses because it's all in your wallet. And, of course, you needn't keep exact tabs on which categories you spend on, although tracking spending can be helpful if you want to cut back in one area or another.

As you stick to your budget, self-discipline is key. Whipping out your credit cards on impulse buys is a real danger, especially if you are trying to end a cycle of lavish spending that you've grown used to. If you find yourself slipping, here's an idea: stick your credit cards in the freezer. There, they'll stay nice and cool until you really do need them. afitch@thenational.ae