From our archive. This article was published on 17 December 2020. Rules and amounts may have changed since.
The classic saying is: “the more you earn, the more you spend”. One of the first steps in managing your money effectively is understanding the way your money comes in and how you then spend it. This can help you make well-considered decisions about your budget, but also pay off any debt and build up a small savings pot.
Categorising your income and expenses is the key
We typically divide income into the following 4 categories:
1. Professional income: salary, 13th month, holiday pay, allowances, bonuses, pension, etc.
2. Income from movable property: interest, dividends, copyright royalties, sale of 2nd-hand items, etc.
3. Income from immovable property: rental income, sale of your own home, Airbnb income, etc.
4. Miscellaneous income: maintenance payments, gifts, inheritance, lottery winnings, child benefit, alimony, etc.
The list of expenses will normally be a good deal longer than the list of income. That makes grouping all the more important. The challenge is to choose your categories as well as possible. You can either distinguish between main categories and subcategories: for example ‘housing’ as a main category, which you then subdivide into ‘rent’, ‘internet’, ‘telephone’, ‘TV’, ‘electricity’, ‘gas’, ‘water’ and ‘other’. Or you can choose end categories straight away by defining them as well as possible. It is up to you to decide how to divide up your expenses, but here are some possible categories to start with:
Food & drink (non-alcoholic); rent/home loan; energy & water; financial services & insurance; transport & vehicles; communication & TV; clothing & footwear; furniture & household appliances; culture, education & leisure; health; hospitality (restaurants and cafés); alcohol & tobacco; childcare; travel; shopping; loans; taxes; pets; personal care; saving & investing; donations; gifts; miscellaneous costs.
Review, budget and control your spending
When you look back at your bank statements for the past 3 months, you calculate the total amount you have spent in each of the categories. You can then divide this amount by 3 to get an idea of how much you spend on average per month in each category. Also take into account any irregular costs, such as taxes or your car insurance. Divide these annual costs into monthly amounts and include them in the category they fall under. The next step is to budget how much money you expect to spend in the coming month in each of the categories. Be sure not to forget to include your savings goals in your budget as well. As long as you have more income than expenses, you are in good shape. If your expenses are greater than your income, you have a shortfall. Then the thing to do is to keep your spending under control. More on that in our next blog posts.
It is a good idea to think regularly about your income and expenses and to put things in order when necessary. Would you like to talk to an expert in budgeting? Then contact us for budget coaching, or create a first overview straight away with our budget planner.
Would you rather get straight down to working on your financial confidence and your financial well-being? Then take a look at what the Financial Well-Being Academy has to offer. That way you will reach your savings goals faster and be able to realise your dreams and projects.