In my previous blog, I recommended using a cash budget to track your income and expenses on a monthly basis. The cash budget is especially useful for people who are struggling to spend within their means (that includes a lot of people!)
Think of the cash budget as a companion to your Income and Expenditure statement. If you want your year-end IE statement to look great, then keep tabs on how you spend your income during the year.
Now, let’s get down to the business. Below is an example of a typical cash budget.
Note the following features:
- It is forward-looking (you are projecting your expenses for the next 12 months).
- It is specific about how you intend to spend your income (you do so by itemizing each month’s expenses).
- The last row projects your monthly savings. Your total savings for the year should be positive even if you have negative savings for some months.
The cash budget is a set of projections. For it to achieve your goal (savings), you need to act on it by making sure you actually spend according to plan. This requires discipline. According to a Citibank survey, only 1 in 3 people with cash budgets stick to their budget on a monthly basis.
What explains this lack of follow-through? Here are two guesses.
Number one: too busy. This isn’t a good excuse if a big chunk of your waking hours are spent sms-ing, facebooking, instagraming, snapchating. Guilty?
Number two: instant gratification. You don’t need another pair of totes but you can’t resist buying. You resolved to spend at least 3 days a week exercising in the gym, but somehow ended up spending those 3 days in the bar.
When overdone, instant gratification is no longer a healthy way to inject a bit of zest to your life; it actually kills your best laid plans. Instant gratification is the main reason why new year resolutions are usually dead on arrival.
Solution: Make a fresh start. Have you lost track of your spending? Are you wondering “OMG, where did all my money went?” Then, turn the page, press the reset button and start afresh. Resolve to jump start your commitment to keep track of your spending starting next month, or right after your birthday, whatever. The important thing is to choose a “temporal landmark”, an easy to remember date to refresh your plan. Psychology research shows that the “fresh start effect” works as long as people are motivated to reach their goals. Read more (Scientific American, “Is it the right time for a fresh start?, March 2016).