I was asked by a friend to write a post specifically on this topic. I’ve been sharing it in one on one and group settings for a while now, but I firmly believe this is the #1 key to long term financial stability and wealth building. Being the 1st of the month, it’s the perfect timing for me to write about this and being Christmas season it’s essential if you want to make it through to January. For most of us we hate details so the idea of a budget freaks us out. What I’ve found though is that almost everyone has no clue how freeing a budget actually is for you and the things it allows you to spend money on.
Misconception – Being on a budget means I can’t do anything fun and have to stay inside and stare at the wall because I can’t have TV or go out to dinner.
Truth – A budget is simply telling your money what it’s going to do, before the month begins, instead of looking up at the end of the month and wondering where all your money went.
A budget doesn’t mean you can’t do anything. The opposite is true, you can do whatever you want… as long as you planned your money accordingly.
Where to start:
Income: Your income is the foundation of your budget. Nothing happens unless you have income so this is the logical place to start. It can also be tricky for those of us that don’t have a steady salary. What you need to do is write down every possible source of income that you may have. This includes part time jobs, garage sales, consignment sales, commissions, tips, etc. If your income is irregular then you should have a pretty good idea of what the minimum you’ll make is. For example, if you’re a waitress and for the last 5 weeks on Friday nights you’ve made at least $200 then you’ll look at the month coming up and see how many Friday’s you’ll be working and multiply it by $200 to come up with the minimum amount you’ll make. Do this step for every possible source of income until you come up with a total amount for the upcoming month. (Note: For variable incomes, only use the minimum amount you expect to make.. we’ll discuss later what you do if you end up making more money than you planned for).
Top of the Budget:
Giving and Saving. Being generous just does something to your spirit. If you’re a Christian then giving 10% of your income to your local church is a Biblical command. If you’re not then find a non-profit group that’s close to your heart and give something. Few of us like saving. Because of this, if we don’t put it on paper before hand and do it before spending money on anything else, we’ll look up at the end of the month and have no money left to save.
Protect your G.U.T.S.:
Life happens! You may have an emergency, or lose a job. The third step of your budget helps you to stay focused on what’s important in life and not worry about the major things in your financial life. It amazes how many people I coach with that tell me they pay their credit card payments on time to protect their credit, yet failed to pay the mortgage payment for the month. Worse was the client I had that spent $200 on new boots but didn’t have any food in the pantry. Protecting your G.U.T.S. first makes sure that the essential things in life are taken care of. Groceries, Utilities, Transportation, Shelter. In that order! Include in your grocery budget every possible meal you’ll eat for the upcoming month. This is for your food so if you think you’re going to be going out to eat with friends 5 times that month then make sure you write that down. If you are having family over for Christmas dinner, take that into account when doing your budget. Include every possible piece of food you can think of in this budget and write that number down, don’t shortcut it or think you can make sacrifices to the food budget right away. It’s an essential thing so make sure you leave yourself plenty of money for food. Next is your Utility budget. This would be cell phones, cable, water, trash, electric, gas, internet, etc. Next is Transportation. Don’t forget to include car payment (you know how I feel about these), car gas, insurance, oil changes, tires, windshield wipers, other repairs, cab fare, rental cars,etc. It may seem weird that I put Transportation before Shelter, but without having money assigned to your Transportation budget, you can’t get to work to make the money to pay for your Shelter… so transportation comes first. Last and most important is Shelter. This includes mortgage, rent, real estate taxes, deposits, etc.
If you take care of your G.U.T.S. first and something happens mid month where you make less money than you expect, or you have to take care of the homeless person that moved in on your front porch, you’re going to feel a whole lot better about you financial position and it allows you to focus on more important things.
Sprinkle in some lifestyle:
Shopping is important! It’s Christmas time and you’ve got gifts to go buy. Be sure to have some amount of money written down in your budget for your Christmas shopping. Also part of your lifestyle budget should be Health, Life, and Disability Insurance, clothes, movies, parties, etc. Anything that’s extra for you in the month that you’d like to do will fit into this portion of your budget. If you think you might do it, WRITE IT DOWN!
Time to be Debt Free:
As long as you have debts, you will need to make sacrifices in the categories above so that you can pay off your debts as fast as possible. If you’re already debt free, skip down to the next section. If you’re not this one is important. This is where your debt snowball (coming in a future post) comes into play. For now, we’ll just leave it at this. List out all of your minimum payments on credit cards, personal loans, student loans, family loans, collections, miscellaneous debts, etc.
Time to Balance:
This is will be the moment of fate for many of you. One of 3 things is about to happen. Your expenses will match perfectly to your income, your expenses will be less than your income, or your income will be less than your expenses. The only way to find out is to total up all of the expenses in your budget and subtract it from all of the income you wrote down in step 1. If you end up having few expenses than income (a good thing) then go back into your budget and find where you can put that money. For example, if you had $5,000 in income and only $4,000 in expenses then you have a surplus of $1,000. If you still have debt then you need to apply that $1,000 to your debt somewhere, WRITE IT DOWN! If you end up having less income than you do expenses then you need to go back through the budget and find where you can cut some expenses or increase your income. For example, if you had $4,000 in expenses and only $3,000 in income you need to go through all of your categories to find places to cut. If you still don’t have enough expenses to cut to match your budget make sure you take care of your G.U.T.S. first and then you’ll have to make the decision on what bill or expense you’re not going to pay. It’s better to decide this up front than to have the debt collector calling to request payment.
I hope this detailed guide helps you in establishing a solid financial foundation for you and your family. If you need help I offer one on one budget sessions for only $20, and it’s included for 90 days as part of my foundational finance program.
Does this help? Do you do a budget each and every month before the month begins? Leave your thoughts in the comments.