Analysis of your own financial situation

Why analyze a household budget?

Imagine taking the bus home, oversleeping your stop, and getting off in a totally unfamiliar place. Everything looks foreign, you don’t see any landmarks. Fortunately, there is a map of the entire city on the bus shelter. You are saved! After all, you know where you live, so you can easily figure out your way back. You only have one very important problem. The map lacks an indicator: “you are here”.

Your plan has fallen apart because even though you know where you want to go, without a starting point it will be very difficult to figure out the optimal route. Sure, you can drive blind and eventually hit it, but nobody wants to do that. So you start searching, using clues such as the name of a bus stop or street.

You use a household budget in the same way. You set a destination like a specific amount of savings per month or a specific value of assets. Then you examine your current situation and are ready to draw a path that, while not straight, will take you to your goal.

Where am I? Your current financial situation

If your household budget is a map on which you have everything that surrounds you (in terms of finances), then you can think of its analysis as a compass to help you take the right direction.

The budget will initially show you one of the following three states:

1. Income higher than expenses – a comfortable situation. While you haven’t yet taken major steps to optimize your cash flow, you’re already generating a surplus. By keeping your costs in check, and increasing your income and investing, you’ll get closer to the much sought-after financial freedom. Though truth be told, if you’re educating yourself on keeping a budget, it’s going to be a very long road and you’re closer to a comfortable retirement than being a man of leisure.
2. Income equals expenses – living from paycheck to paycheck is very risky. Since you only have enough money until the end of the month, what do you do when a transfer is delayed or an unexpected expense pops up? It can be tough. Still, it’s not bad. You’re doing well, and making improvements is still ahead of you.
3. Income lower than expenses – red light. In the months when you have large one-time expenses, such situation has a right to happen and is normal. However, if it repeats, you’re on a straight path to spiraling debt and bankruptcy. React, there is no time to waste!

When reviewing your budget, go from the general to the specific. Navigate the main categories. Look into the subcategories and identify leaks on the ship only if the costs exceed the assumed levels.

Just to avoid any doubts: the spending limits you set for yourself are not carved in rock. You don’t have to stick to them rigorously, but when you cross them, it’s time to analyze and understand why. If you are spending more on food, is it due to food price inflation or simply eating out too much instead of at home?

Confront your assumptions with reality. It can be frustrating at first, but one of the common excuses I hear from my readers is fear! Fear of knowing the true extent of expenses and thus the source of financial problems. Take it logically. What is worth doing? Pretending the problem isn’t there, or getting rid of it?