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Planning a Monthly Budget

It's time to look at the implications of not knowing how much you're spending month by month. We'll also consider the benefits of keeping a daily spending diary.

I have a friend who's an adviser to small businesses and he has a pet theory that many businesses that go bust do so not as a result of a major investment decision - renting a shop, a big marketing campaign, upgrading computers, etc. - turning sour, but rather on the back of small, almost invisible, but bank-balance-sapping expenditures.

The same can be true of our personal finances. Not many of us go out every month and spend £500 on the likes of a new TV, or kitchen table or a motorised lawnmower. On the other hand, we can regularly find ourselves forking out for a round of drinks here, a DVD there, maybe a magazine, a taxi home, a sandwich for lunch and so on. And it's often the cumulative effect of these here-and-there microspends that tilts our bank balance into the red or puts one of our credit cards onto a life support system.

Realistically, it's not easy to keep track of what we spend, particularly as we often use credit cards for day-to-day expenditure like the supermarket shop. Credit cards can be helpful additions to our financial armoury but they can all too easily blur our sense of what we're spending. Not so long ago, we would withdraw some cash from the bank and that would be our weekly budget. We had no obvious other source to draw on and so we had to make do with the cash we had to hand.

So here's the crunch question: do you have any idea how much you've spent over the past month. I'm betting that only a handful of people could tell me to the nearest pound. OK, so maybe that handful needs to loosen up a bit, but if you produce an estimate of your monthly expenditure that's out by say 10 per cent or 25 per cent or even 50 per cent, the signs are that you may have a money management problem. Alternatively, you may be the possessor of wealth so vast that you really don't need to be reading this book at all (you're welcome to stay by the way, it's just that you're not the market segment I'm currently addressing).

Of course, you can't know how accurate your estimate is without having the actual expenditure figure available. To this end, and also to provide a base for a budgeting system for the future, I'd like to encourage you to keep a comprehensive daily diary of expenditure for one month. Yes, write everything down - bus fares, coffees, magazines, dry cleaning, supermarket shopping, direct debits, phone bills, car fuel, dog food, everything else. Don't rely on memory: you'll inevitably understate the true figure.

When you've gathered a month's data, see what your reaction is. Pleased? Horrified? Then try categorising what you have spent under the headings 'fixed costs' and 'discretionary spend'. The point is that once you're armed with some quality data, you're in a position to respond and take any necessary action.


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