A Debt Coach covered Financial Goals and Estimates vs. Actual in the last two publications. Before you can create a workable budget, you need to figure out your goals, net monthly income and your current monthly expenses. If you have not completed or read the first two publications, Please go back to Own your Life – Financial Goals and Estimates vs. Actual to get prepared for your new monthly budget.
What is a Budget – A budget is the conscious act of thinking about how much money you have available and then deciding where you want the money to go, living within the limits you set for yourself, following one golden rule – not to spend more than you make.
Just by maintaining a workable budget, you could pay off debt, save for a vacation, your child’s college fund or retirement. Whether you are currently struggling to maintain a budget, behind on your bills, or want a better way to manage your assets, you must have a workable budget to follow to get back on track. Budgeting helps you turn those dreams into reality by getting those ideas down on paper and then converting them into numbers you can work with. Budgeting then helps you manage your day to day spending so that you can reach those dreams. With a budget you will be able to think about your spending before it happens, instead of after that spending has caused other problems. It isn’t difficult to do and only takes a couple of hours every month and there is just one basic rule to follow – don’t spend more than you make – the rest is up to you.
Let’s create a Budget. Print out the above Monthly Budget Worksheet and using the numbers from the Estimates vs. Actual game, start filling in the Monthly Budget Worksheet. (We recommend you make a couple of copies and use pencil as you may find yourself revising it a number of times before you have a final budget.)
During the past 30 days you have been tracking your expenses to get a better understanding of where your money is going. Now it is time to decide if this is how you want to spend your money and to transfer those amounts to the budget you are going to follow.
First start by listing the monthly amounts of your financial goals from the Financial Goals Worksheet, just divide the Goals Cost by the Time Frame to get the monthly amount. You have heard the saying “Pay Yourself First”, this is where you actually put this into action.
Second transfer your Fixed Expenses. These monthly expenses are the same month in and month so just transfer the payment amount you listed on the game board. That is not to say things can’t be done to change those payments; mortgages can be refinanced, cheaper rent can be found, and debt can be paid off. Until the payment is changed, however, your budget has to reflect what you are currently required to pay. Use the blank lines to list expense types we did not cover or to list the name of the lender/creditor you are repaying.
Next transfer the Periodic Expenses. Remember these are non-monthly expenses, so the amount you list needs to be the monthly amount you need to save to meet this expense when it comes due.
Finally list your Flexible Expenses. Remember these are the ones you have the most control over so start thinking about whether you want to spend money on this expense and, if yes, how much you want to allocate towards it.
Now it’s time to see where your budget stands. Take your Budgeted Income and transfer it to the Total Income spot at the bottom. Next add up all of the monthly payments and list that total in the Total Expenses field. Subtract the expenses from the income to get your difference. This number needs to be $0.00, if not then you still have work to do.
Some will have a positive number left over; if so, please double check your expenses. Make sure you didn’t leave anything out. If there is still a surplus, just allocate more funds to your financial goals, debt repayment or other expenses. It’s your money, you worked hard for it, and you get to decide how to spend it.
If you have a negative number left over – well then it’s time to cut back. Make the hard choices now! Do not convince yourself you will make the money later to take care of this shortage. If that money does materialize then you can incorporate the funds into the budget, after you’re earned it, not beforehand. There are several categories that you can make a change in your spending without reducing your quality of life. Look hard at each item; is it a Want or a Need?
A Need is something you have to have, something you can’t do without. A good example is food, housing, transportation etc. If it is a need, then do you have to spend as much as you are? Can you reduce your grocery spending or cut down on gasoline consumption? Ask yourself questions like these as you review these needs.
A Want is something you would like to have. It is not absolutely necessary, but it would be a great thing to have. A good example is Cable, Cell phones, internet etc. There are several different items within your budget you can control. Eating out and Entertainment can be planned in advance to help save money.
A good idea is to prioritize your wants, reducing or removing those that are at the bottom of the list. You can even rethink your financial goals if you need to; maybe you were being too ambitious with your goals. Stretch your time frame out to reduce the amount being saved monthly, just don’t cut the goal out altogether.
Is your credit card debt growing? In most cases, people that have a very tight budget or are running short will use credit cards to cover the difference. This is a recipe for disaster and must stop now. The main goal of a budget is to not increase your debt obligations but to pay them off. If you feel this is too much and need help, call A Debt Coach today. Let us review your budget and help create a game plan to get debt free.
Once you achieve a difference of $0.00 you have a budget to follow. Do not expect this to happen in the first sitting. It will probably take you numerous revisions to get a balanced budget. Even once you have a workable budget and start implementing it you will find you continue to fine tune it as you figure out your priorities and where you want your money to go. So, take your time.
How much is too much, or when is it not enough?
When working on your budget these questions are bound to jump into your mind. First, keep in mind that every family is different, even when they have the same number of people in it. You may have a special needs diet, they may have to carry internet at home for work. Just because you spend one amount does not mean that it should be the same across the board. That being said, it is still nice to see where you stand compared to the others in our community. It gives us a yardstick to measure our own spending against the spending of others.
Our next article will cover how to set up the control and monitoring system for your budget so you can continue to Own Your Life.
A Debt Coach Credit Counseling Service. 888-767-9155, Adebtcoach.org