The best tip for managing your finances successfully is to run them as you would a well-organised business.
The essentials are not rocket science. You have money coming in and money going out. The difficulty may be trying to ensure there is money available when it needs to go out, and that is down to cash flow, having enough money spare when it is needed.
For the computer literate, a spreadsheet is a godsend for planning finances, but for those who do not use a computer, a note book can work just as well.
Make a list of all the sources of expenditure in your financial system. For most people this may start with mortgage repayment or rent, and go onto taxes, electricity, other fuels, insurance, car running costs, household food, travel costs – i.e. petrol (gas) and several others.
Be specific and break down insurance into house, car and any other. If you even more specific you could build in a heading called holidays or entertaining. Make up the list to suit your own personal situation.
Some of these expenses will represent regular outgoings, like food and petrol. Others may be one off annual payments, an insurance premium maybe, or a tax bill.
Break down all your expected annual costs into monthly parts, i.e. divide each by 12. This will give you an approximate total of money you need in your financial system each month. Not that it has to be spent each month, but perhaps it needs to be saved each month so the total is there when it is due.
Your income may well be one isolated figure. In many countries this will be a gross income, in other words you will have to budget and save an amount in order to pay tax on it later. In the UK, and some other countries, it may be that your income tax is paid at source by your employer, and therefore you have a net income amount and no tax need be saved.
Add up your monthly expense totals. If they total less than your monthly income you are a lucky person, and you can think about adding an amount, perhaps to the entertaining budget, or the holiday fund. But add it somewhere so that all the money is accounted for.
If your monthly expense total is more than your income, you will need to reduce some of the figures in your expenses list. A number of those cannot be reduced, as they are fixed costs. Only reduce the ones which you are able to reduce, and be strict about it. If you have to spend less on entertaining, that is the way it will have to be if you are not to go in the red with your account.
This method is based on the premise that you do not use a credit card. If you have been using one, and you are starting out with this system, divide your credit card total balance by 12, (or more if it is enormous) and strictly pay off the set amount every month. Then never use the credit card again.
The same thing applies if you have an overdraft when you start this system. Divide it into manageable amounts and strictly pay off each one every month till it is gone. When it is gone, and the credit card balance has gone also, you will have more money to allocate to other expenses. You may have to wait a while to reach this stage, but the waiting is worth it.
This method gives you one great advantage. During those months when you are setting aside money for different annual payments, that money is sitting in your bank, keeping your total balance in the black. Do not be tempted to spend any of that money on anything not budgeted for in your system. If you do, when the time comes to pay an annual payment, there will be insufficient cash available. That will drive you back to the need for a credit card or an overdraft and you have failed to manage your finances successfully.
So this system takes care of the cashflow problem. Most annual payments go out at different times of the year. This means you will always have spare cash in your account, as you will always be saving for something coming up. Therefore you never go into the red and never need an overdraft.
Remember the basic premises to financial planning: never spend more each month than is coming in, and know exactly how much you are going to need each month and each year, so you can save and ensure that the right amount is available when needed.