January 30, 2013 by Will Ray
Many of you may have made a resolution to handle your money better this year, get out of debt, or reach a financial goal.
How’s it going for ya?
Whatever your goal is, your most valuable tool for making real, solid financial progress is going to be The Budget.
I’ve discussed the importance of a budget before, but for us, the budget is how we have made and measured our financial progress.
How did we pay off a 15-year mortgage in 32 months? The Budget. How did we live on $40,000 when our income went to $80,000, $100,000, or more? The Budget. How did we get the most “bang for our buck?” You guessed it – the Budget.
So, how do you do one of these so-called “budgets”? So glad you asked. Now is the time to do one, if you haven’t yet, for the month of February. Do a budget each month, before the month begins. When the money starts coming in, you know where to get it. You’ve got a day or so, and the clock is ticking.
If you’ve never done a budget before (or maybe tried and failed), the thought, or even the word “budget” can be intimidating. No reason for it to stay that way. A budget is simply a plan for how you are going to use the money that’s coming in.
If you are a budgeting virgin, start with a blank sheet of paper. Spreadsheets, Mint.com, Quicken, MyTMMO.com, and the other programs are all great tools, but let’s walk before we run. Grab a notepad or a sheet of paper and let’s begin.
1) Name the Budget
At the top of the page, put the month and the year. In my opinion, budgets are best done monthly, as most bills are on a monthly cycle. Yearly budgets also have value, but we’ll stick to monthly budgets for this discussion.
2) How much do you have to budget?
Below the month, put your monthly take-home pay – how much you bring home each month after taxes.
(Example uses $3,000/month, for annual salary of $40,000-$45,000). If you’re salaried, easy-peasy. If you are paid hourly, look back and take the average of your last 3-4 months of income. Unless you have a big change coming up this month, that’s a reasonable amount to expect.
3) Regular monthly expenses
Now the fun really begins. Brainstorm all of your recurring monthly expenses and list them out. Food, rent/mortgage, lights, water, cell phone, fuel, insurances, cable, clothing, debt payments, dog food, giving, HOA dues – there’s a start. Next to those names, put how much they will cost you in February – not the perfect-generic month that never seems to happen. Look at your bills due in February and write down the amounts.
Don’t forget to add in blow money, spending money, grease money, walking around money, whatever you want to call it. Just build in some extra cash to cover the small expenditures (<$20) that do just come up from time to time.
4) Annual, semi-annual, or quarterly expenses
After that, also think about annual or semi-annual larger expenses that you need to put away a little bit each month for – car maintenance, property taxes, some insurance, medical examinations, vet checkups, tuition, etc. Think about (or find out) when they’re due, and divide how much you need to spend on them by the amount of time you have left.
Example: I know that my life insurance costs $330, billed annually in August. I haven’t saved for it at all, yet. With six months to pay for it (February-July), I need to save $55 each month ($330/6 months = $55/month).
Really think through all your expenses. Are there birthdays coming up? Vacations? What has been an “unexpected expense” before that really shouldn’t be “unexpected?”
5) Look at the whole picture
Subtract all the expenses from your monthly income. Money left over? Give every dollar a name (and purpose). Otherwise life will take it and you won’t know where it went. You want your budget to be zero-based.
In the red? (too many expenses, not enough income) Start shaving here and there. Where can you cut back this month to stop the bleeding?
If you’re married, do this whole thing with your spouse. Single? Ask a trusted friend (that’s good with money) to look over it with you and share their thoughts. Consider asking them to keep you accountable. If you have a spouse, they likely will keep you accountable.
Once it’s settled, that’s it. Plan your work, and work your plan, as the saying goes. Go execute the plan, and DO NOT DEVIATE. This is an agreement between you and your spouse, or with you and yourself. Don’t let them down, don’t let yourself down. You spend only what’s on the paper, unless you discuss it with your spouse or accountability partner. Don’t change the plan on them mid-stream when you’ve agreed on something different. Talk it through and come to a resolution together.
If it hurts, and is messy, and doesn’t work as well as you had hoped, it’s okay. Month 1 is never pretty. It takes about 90 days to really get into the swing of things, so be ready to stick with it.
Just keep after it, and don’t give up. Don’t give up. Don’t give up. It’s worth it.
Question: What’s the hardest part of budgeting for you? What would you like to do better with you budget? If you’ve done a budget for a while, how has it helped you?