Analysis of your own financial situation

Why analyze your household budget?

Imagine you’re on the bus heading home, you fall asleep, miss your stop, and get off in a completely unfamiliar place. Everything looks foreign; there are no landmarks in sight. Luckily, there’s a city map at the bus shelter. You’re saved! You know where you live, so you can easily figure out the way back. There’s just one major problem: the map is missing a "you are here" marker.

Your plan has fallen apart because, even though you know where you want to go, it’s very difficult to determine the optimal route without a starting point. Sure, you could wander blindly and eventually find your way, but nobody wants to do that. So, you start searching, using clues like the name of the stop or the street.

You use a household budget in the same way. You set a destination, such as a specific monthly savings goal or a target net worth. Then, you assess your current situation and are ready to map out a path that—while not necessarily easy—will lead you to your goal.

Where am I? Your current financial situation

If a household budget is a map showing everything that surrounds you (financially speaking), then analyzing it acts as a compass to help you head in the right direction.

At the start, your budget will reveal one of the following three states:

Income higher than expenses - A comfortable situation. Although you haven't yet taken major steps to optimize your cash flow, you are already generating a surplus. By keeping costs in check, increasing your income, and investing, you are moving closer to the fabled financial freedom. To be honest, though, if you're just brushing up on budgeting, it will be a long road, and you're closer to a comfortable retirement than becoming a rentier.

Income equal to expenses - Living paycheck to paycheck is very risky. If your money only lasts until the end of the month, what will you do if your paycheck is delayed or an unexpected expense pops up? You’ll be in a tight spot. Still, it’s not all bad. You’re managing, and you have yet to implement improvements.

Income lower than expenses - A red light. In months where you have one-off, large expenses, this can happen and is normal. If it keeps repeating, however, you are on a direct path to a debt spiral and bankruptcy. Take action—there’s no time to lose!

When reviewing your budget, focus on the big picture first. Move through the main categories. Only if costs exceed your projections should you dive into subcategories to plug the leaks in your ship.

To be clear: the spending limits you set for yourself aren't set in stone. You don't have to stick to them rigidly, but when you exceed them, it’s time to analyze and understand why. If you’re spending more on food, is it due to food price inflation, or simply too many meals out instead of at home?

Confront your assumptions with reality. It might be frustrating at first, but one of the common excuses I hear from my readers is fear! Fear of knowing the true scale of their spending and, consequently, the source of their financial problems. Think about it logically. What’s the better move: pretending there’s no problem, or getting rid of it?

Where am I heading? Your financial plans

Once you’ve ensured your financial statement is as accurate as possible, it’s time to start planning changes that are actually achievable and commit to carrying them out.

First and foremost, plan your long-term financial goals. Ideally, by the end of the year. I’m not talking about the funds you know from previous material—like sinking funds or irregular expense funds. I’m talking about new priorities.

• How much do you intend to save?
• How long will it take you?
• Can you cut out any unnecessary expenses?
• When will you increase your earnings?
• How will you go about doing that?
• How will you protect your capital from inflation?
• What do you ultimately want to invest in?
• What can you automate?
• Do you want to retire early?

And many other questions you can ask yourself.

Once your budget is in order, your goal is to maximize the benefits from the capital you already have, while maintaining appropriate liquidity, of course. First and foremost, you should pay off all consumer debt. Early repayment is a guaranteed return at a specific interest rate that you are unlikely to beat with your own investments. If you have debts and don't know how to handle them, I will dedicate the entire next module to this topic.

Assuming, however, that you have no liabilities, start improving your situation right now. This is a long-term game and there is no reason to wait; the power of compound interest will pleasantly surprise you. Focus especially on the big decisions, which yield much better results than agonizing over every single cent.

And remember that no one but you can change your approach to finances. Not even me. You have to do it yourself. I am happy to point out what is worth paying attention to, but I cannot force you to sit down with your budget for those few dozen minutes and plan your actions. Reading one or even several articles can be uplifting, but without putting at least some of that knowledge into practice, it is essentially a waste of time.