Preparation
Now that you’ve got a bit of history on your spending (you did start to record your spending, right?), let’s start working on a budget. Yes, I said it, that nasty ‘B’ word! Budget has such a nasty connotation to it, but it really isn’t a bad thing.
It’s always a good time to start a budget. I actually made my first real budget in the middle of my layoff (and you wouldn’t believe how much I didn’t want to do it). There’s always an excuse not to do it, but trust me, do it! It makes all the difference in taking care of your money. It definitely stretched my money further in the time I needed it most.
A budget is a tool, that’s it. It doesn’t control your life and it doesn’t tell you what you can or cannot buy. The budget is there to help guide you and help you keep your money under your control. Clear your mind of all the bad things you feel about a budget and follow through the process my family uses.
Gathering Information
The first thing we need is to gather up all the information we can find for the month ahead. Get your payment amounts for any fixed expenses (rent/mortgage, phone, cable/satelite, car payment, etc). Use bills from the last few months to make an estimate on utility expenses for the coming month (electric, gas, etc). Use some common sense, if you are going to run the air conditioner more this month than last, estimate that you’ll use more electric. Finally, have your spending information from the previous month handy.
We also need to do the same thing for our anticipated income for the month. If you are on salary, this is easy. If you are hourly or commission, you will need to estimate. When estimating income, I recommend estimating a bit on the low side (it’s much easier to spend more than spend less).
Preparing Your Budget
Now, set up a form (this is much easier with a spreadsheet or software program like Microsoft Money, but you can do this on paper as well). You’ll want a column for the category, a column for putting the budget amount, and some room to the right to record what we spend through the month.
In the category column, put in all of the categories you have been tracking. Start with the income categories. Place a “Total Income” line after your income, then do your expense categories. I like to start with the essential categories first (the ones that aren’t flexible, like rent), and put more optional expenses towards the bottom. Place a “Total Expenses” line after your expense categories.
Our First Draft
Now we can start the fun stuff. First, place your income values at the top. Once you are done, subtotal them. That’s how much money we expect to have come into our grubby little hands this month.
Our goal now is to spend it. No, that wasn’t a typo… Yes, you heard me right… We’re going to spend every penny of that money! We are going to use this budget to make our money do what we want it to. That’s the key to taming money.
Have all the information you gathered handy and start filling out your budget, top to bottom. Fixed expenses like rent are easy. Expenses that change from month to month (like groceries) will need a little thought. Use the records you’ve been keeping, along with some common sense, to make a pretty good estimate. Don’t worry about how much you are spending yet, just fill it out with what you think you will spend on each category for the month.
Total and Compare
Grab a calculator and add up your expenses. Compare the “Total Expenses” to the “Total Income”. If you’ve spent more than you are going to make, we’ve got a problem. If we spend that much money, we will go into debt for the month (not a good idea if you want to tame your money).
Let’s go back and look at your expenses for the month. Look at the items you consider a luxury (this varies based on your personal choices). For me it’s something like dining out or entertainment. Trim what you can out of the optional expenses and add it again. Keep at it until you can get your expenses below your income.
If you cannot find a way to do that, you will go further and further into debt. The whys and hows of debt reduction will be coming in another post, but for now let’s just say you don’t want to go further into debt. At this point, you need to take a hard look at things. If there is a one-time expense that won’t be continuing (healthcare, car repairs, temporary layoff), then you can recover. If it is a continued expense (car loan, credit card bills, mortgage) that is causing you an issue, you will be digging a hole that will be harder and harder to crawl out of. Find a way to get your expenses to be less than your income (and seek professional advice if you can’t).
Smile at the Tamed Money
You now have a plan to spend less than you earn. Subtract your total expenses from your total income. That is money we can put towards other goals, such as an emergency fund, long-term budgeting, or debt reduction (I will be covering these topics in this series). Yes, my friend, you have now tamed your money.
Recording and Adjusting
The work is not done yet. You cannot turn your back and ignore the money and expect it to stay tame. We need to keep control of this money, and to do this we use the budget we just worked so hard on. Record your expenses, just like you have been, but keep a running tally on your budget. Your goal is to not spend more than you have budgeted.
If you need to go over your budget, don’t panic! Find another category that you’re not going to spend as much as you planned. Move money from that category to the one you are going to go over on. For instance, say I had $250 planned for gasoline but I’m going to need $300 to make it through the month. Maybe I planned on $200 for dining out and I’m only going to use $150. and don’t plan on going out again. I will adjust dining out to $80 and gasoline to $220. This keeps the expense total the same, keeping our money tame.
Don’t worry about adjusting your budget. You will adjust your budget frequently, everyone does. The key is to make sure you move money out of one category and into another category.
Discipline
Just like recording your transactions, budgeting takes discipline. Be sure to review your budget frequently (daily if possible), and always be aware of how much you have available in a category before you spend money in it.
Some people like to use the envelope system. This is a simple idea that works well if it is difficult to control your spending. Have some envelopes handy when you make the budget. Label the envelope the appropriate category and put the amount of cash into the envelope that you plan to spend that month. For instance, if I plan on spending $250 on groceries this month, I label an envelope ‘Groceries’ and put $250 into it. When I go to the grocery store, I take the envelope with me and buy all my groceries from that envelope. When the envelope is empty, I’ve used my money.
If you’re a bit more disciplined, you can use index cards. Make an index card for each category and put the total budget for the month at the top. Every time you buy something, deduct the purchase from the total. That will give you a running total of what you have available in that category.
Repeat Repeat Repeat
Keep your records through the month and use them again next month just like you did for this month. You will improve your estimates the more you do this. As long as you make a budget each month and use it as a tool, you will keep your money tame and it will do what you tell it to.
Digg it!
Stumble it!
Posted under Budgeting, Series
As I reviewed what was going to be on the Ohio Ballot this year, I came across Issue 5. This referendum would cap payday loans to a maximum of 28% APR. What is appalling is that the current cap is 391% ($15 interest on a 2-week $100 loan).
I still have an old Nintendo 64 that I hooked up to the TV. It still works like a charm. The graphics are dated, the games are ancient, and do you know what? My son’s friends come over constantly to play. All of them have their own gaming consoles (yes, the expensive ones listed above) and quite a few games, yet they come to my house to play a gaming system that was made in 1996!
