Budgeting

Introduction

What do you think of when you hear the word "budget?" Most people hear the word and cringe. If this is you, take a look at budgeting from a different angle. Think of budgeting as a process that summarizes how you spend your income and creates guidelines for your spending. In all reality, a budget is simply a tool to increase your awareness of how and where you spend your money and helps you have control as you spend money on the things that are most important to you.

We all have income. We all have expenses. Without the proper allocation of the money that comes and goes, something may fall short. The goal when creating a budget is to lay a foundation that will help you allocate what portion of your income is required to cover each expense. The purpose of this article is to help you develop a budget, and teach you what you need to know in order to do so.

Why Create a Budget

A good way to make sure you have enough money to spend and save is to use a budget. A budget helps you make sure your income matches your expenses. A budget also helps you with saving money. It’s simple. Does this mean that you won’t be able to have control of your financial affairs if you don’t create a budget? No. Some people are able to do well financially without ever creating a budget. But if you are not one of them, you have nothing to lose (except your money/financial freedom).

Each month, you may receive income from the job you have, and the interest from the money you save. Also, each month you will have expenses. Your goal should be to get to the end of each month before the total of expenses grows bigger than the total of income. Sometimes the time frame is not the calendar month, but the paycheck month. Whatever the "budget calendar" timeline is for you, setting up and using a budget will help you account for your money. It may even help you to be able to save more of it each month.

Prepare to Budget

Before you can actually create a budget, there are some things that you need to do in preparation. Failure to do this can result in unnecessary frustration later on.

Check the Attitude

If you plan to start your budgeting program with a bad attitude about it, plan right now to be frustrated, confused, and most of all, plan to fail. If your attitude is one of penny-pinching sacrifice, you have already set yourself up for a bad experience. After all, how long will you want to do something that you don’t enjoy?

There are a couple of guidelines to keep in mind that will help you have the right attitude for budgeting. First of all, the budget is for you to live by, not your neighbors. If you have the mentality of needing to keep up with the Joneses, a budget will never work for you. You will continue to evaluate your budget based on what other people have and do that you would like to have and do. If you want to be able to budget in the things that your neighbors and friends do, then you need to follow the second guideline: setting goals and working toward them.

Your budget may not allow for a new boat at this time no matter how much you want it. However, by using a budget, you can actually work yourself into a position (with time) in which you can get that boat. Sure you don’t want to wait, but you don’t want to face the penalties should you not be able to afford all the debts you incur. Lifestyles of the rich and famous don’t fit into most middle-class incomes, but properly managed finances can produce flexibility to enjoy some of that lifestyle. As long as you are willing (have the right attitude) to set financial goals and use a budget to achieve them, you will eventually get there. That doesn’t mean a budget will help you become a multi-millionaire just because you created and followed a budget, but you may feel you are almost there because of the financial freedom you will create.

Gather Your Facts

You can’t budget until you know exactly how much income you get and how many expenses you have. Because of this, you need to gather some personal financial data. You need to know how much income you receive. This is probably the easiest and quickest data to gather.

Next, you need to know of your expenses. This may seem easy too. After all, you will think about all the fixed expenses (expenses that occur every month, usually for the same amount) and figure that you already know all of your expenses. Well, you are wrong. There are variable expenses to be accounted for also. What are variable expenses? Well, these are the expenses that do not occur on a regular basis like utility and housing payments. Think of the occasional doctor appointment, or occasional dinner out, or the occasional sporting event, or even maintenance on your car. These are all expenses that you need to know about for your budget.

To gather this information, look at your credit card statements for the past three months. Also, look at your checkbook register. And don’t forget about the expenses you paid for with cash. Use receipts from these expenses to help.

Ready? Go

Now that you have your facts, it is time to create the budget. Having gathered those facts will actually make the actually budget creation much easier. Use the following steps to create your budget and be successful in doing so.

Set Up Budgeting Categories

A successful budget will include categories that reflect the way you actually spend your money. For example you may have a "Utilities" category. However, you may have multiple utility bills (gas, electricity, telephone, etc.). Because of this, you need to create subcategories to match those. Trust me, it is better even though it is a little more work.

Make sure to include habits (smoking, drinking, etc.) and hobbies (golfing, gardening, etc.) that you maybe wouldn’t think to consider including in a budget. You will be surprised how much money you will identify under these categories. You may not want to see these categories because you might just feel some guilt for spending so much money on that stuff. Well, that is part of budgeting. I will tell you right now that a budget will identify areas that you may need to cut back the spending and sacrifice the enjoyment of for a time period. You will be a better person for it. Besides, if cutting back on smoking saves you some money, you will be able to get that boat sooner and maybe be alive to use it.

Calculate Budget Amounts for Your Categories

This part is already partially done just because of your fact finding. First you need to know what your average monthly income is. Make sure that you are including not just your income from employment, but also income from interest earned on savings accounts and cashed in returns on assets.

Next you need to look at those expense categories that you created and calculate amounts that you will need for each. You can look at the billing statements from the last few months on your fixed expenses and average it out if you aren’t on an equal pay plan for the item. For the variable expenses, you will need to look at receipts, check stubs, and credit card statements to calculate an average for each category over the last few months. Remember, the more precise that you can be with these calculations, the better the results you will have with budgeting. This will especially be helpful if you need to trim your expenses because you will know which categories can afford to be cut back on.

Enter a Record of Your Expenses for Your Categories

Now comes the part where reality starts to set in. You have already identified the dollar amounts associated with your income and expense categories, now you need to enter the true data. Using your checkbook and credit card statement(s), enter each expense in the corresponding category for the previous month. Don’t forget to include any expenses paid for with cash. Also, make sure to enter your income for the previous month.

After entering all expenses and income, subtotal each category. This tells you how much you have spent for each individual expense over the last month. The fixed expenses shouldn’t be too much of a shocker. However, more than likely, your variable expenses will shock you. Don’t worry, that means you have a better understanding of your finances than you did a few minutes ago. Next total up all the income categories and see how much income you had last month. Next (and don’t be scared to do this) total all the expense category subtotals to come up with one sum of all expenses. Be brave and look at the total. Is the expense number higher than the income number? If not, then congratulations. You should take that extra from the month and celebrate, right? Wrong. Congratulate yourself, pat yourself on the back, do whatever to show your pride in making it through the month without spending all of your money. Just don’t do something that will spend all of your money. The best thing that you can do with any remaining money is to put it in a savings or investment account. Let your leftover money become a source of income with interest earned.

What if your total expenses were more than the total income? That means that you are probably not paying all of your bills completely. In fact, you are probably carrying a balance on your credit card. Well, you have two choices at this point. First you can turn to divine guidance and pray for a miracle (or the winning lottery ticket). Or second, you can re-evaluate your budget, specifically your variable expenses, and see what you can cut back on. You may also find ways to cut back on your fixed expenses (turn off lights in empty rooms, take shorter showers, etc.). Remember, achieving financial security and financial freedom will require some sacrifice at some point, and most likely at the beginning.

Evaluate Goals and Adjust the Budget

Remember those goals that you should have set before starting your budget? Well, now is the time to re-evaluate them…especially if you have more expenses than you have income. The first place to look is the categories with the largest spending. Are those categories for items that are necessary (housing, utilities, food, transportation, etc.). If so, you may need to look at the other categories that are not so large in spending. You may also need to look at subcategories of those categories.

For example, you may have a food category that is broken down into a grocery sub-category and dining out sub-category. Maybe you need to cut back on dining out. Of course this may mean that your grocery sub-category may increase but the ratios of decreased expense for dining out compared to increased expense of fixing your own meals will be in your favor.

You may not want to eliminate some of those comforts that you are enjoying right now. Hobbies and habits may suffer. However, if you truly want to accomplish those goals that you set before you created your budget, you will have to sacrifice a little. But remember, sacrifice in this case is not a bad thing. Need a little more incentive? Tape a picture of a boat (if that is your goal) or the list of your goals to the bathroom mirror, bedroom mirror, refrigerator door, and car dashboard (okay, maybe not all of them) so that you can have the visual reminder of why you did all this in the first place. Think of how nice having extra money will feel. Think of how nice it will be to afford retirement. Think of what you will name your boat.

Make the necessary adjustments in your budget as well as your spending habits. It doesn’t help one if you don’t adjust the other. You will not only see financial benefits for this, you will be gaining more control of your life and finances.

Make Monthly Reviews of Your Budget

Once you have done all of this, you are done. That is, you are done until the next time you incur an expense or income. The fact of the matter is, with budgeting you will probably never be done. You will need to track your expenses and income each day or each week. At the end of each month, you will need to evaluate to make sure that your budget is working for you. Do this by comparing the actual expense with the amount you budget for the category. You may still need to make adjustments but after having gone through it already, it should be easier.

Your life changes daily. You may move, have kids, go back to school, or just experience the regular cost-of-living expenses that we all face. Monthly reviews of your budget will keep you ahead of these changes so that you aren’t overextending yourself financially. Do not pass up this step if you truly want to be successful at accomplishing those goals.

In the End

When you create a budget, you are performing an action that demonstrates your determination to control your money so that it doesn’t control you and your lifestyle. If you think of budgeting as a process that makes your life miserable, it will be just that because you won’t be able to take control. Believing that a budget will help you, and keeping that in mind not only when you create it but through your daily life in keeping to it, will help you stay in control of your money. It will allow you to find some financial freedoms and help you to avoid pitfalls.

As you work to gain financial control and financial freedom, keep in mind the goals that you will be able to accomplish by sticking to it. It may take time, but you will succeed. Will it make you a millionaire? It could but it might not. Yet you can still enjoy a comfortable life with a lot less stress by knowing that you are controlling your money.