Failing to plan is planning to fail – Benjamin Franklin
If you don’t have a budget, you are living dangerously. You have either fallen off the ship, or you are taking on water and sinking slowly – you may not even realize it.
This article is an introduction to the budget process to keep it from becoming too lengthy. In future articles, I will discuss the upcoming steps much more in detail.
Your budget is the first step in taking control of your life and your finances in order to eliminate your debt and build your wealth. If you’re like I was, I never really had a budget, my main goal was to avoid spending more than I made each month. If at the end of the month I still had a couple of bucks left in my checking account, that was a win. Now that I look back, I was not winning; in fact I was losing every month I did not have a budget.
Budgets have a negative connotation with them don’t they? In my early days, budgets stood for – no fun, all work and no play makes Ryan a dull boy, no money for eating out or video games, and no freedom in general. I felt budgets were restrictive in nature and I worked too hard to not enjoy my hard earned money. How many of you feel the same? I have heard countless remarks from friends who state, “I can’t take my money with me,” or “why shouldn’t I have fun with my money now while I’m young and healthy? Who knows what could happen in the future, I could die or become sick and be unable to enjoy life.” This rationale is based on fear of the future and/or how people justify the lack of proper money management that will set them up for the future.
If you fail to plan for your future – you will have none. Can you afford to live on social security alone when you get to your golden years? I highly doubt it. You have a pension? If you live for 20 years after retirement, the cost of living raises you may or may not get do not always keep up with inflation. In reality, your golden years will not be so bright if you live for today and ignore tomorrow.
The truth is, you can have a budget and enjoy life at the same time. How you ask? By setting money aside that is just for fun. My wife and I each have a set amount of fun money we get each month. It’s an amount of money set aside in the budget that we get to spend on whatever we want. That means I can either spend all that money each month on junk food and video games or I can save it up and buy something totally ridiculous that would normally be a waste of money without any guilt or credit card debt. Your budget is what you make of it. The idea of a budget is to tell your money where to go, rather than wondering where it all went.
Ok, so how do you set up a budget? Budgets should be written down and set each month because income and needs may change. You can not set one budget and leave it, it must be revisited each month. So what are the steps to creating a budget? I will break it down for you. The first month you do a budget, it will be very time consuming. However, after a couple of months, you will get the hang of it and your monthly budget will only require minor tweaks. So without further ado, here are the steps to creating a written budget:
Step 1: Write down your income
Step 2: Write down your monthly expenses
Step 3: Cut out unnecessary expenses and build a strategy
Step 3.5: Pay off those debts!
Step 4: Building your future (discussed in a future article)
Step 1: Estimate and write down as close as you can, to the exact dollar, how much income you expect to receive in the coming month. Not what you wish or hope for, but the minimum amount of income you are guaranteed to receive.
For a free and easy customizable budget excel spreadsheet, download this excel spreadsheet from http://www.mint.com. I highly recommend Mint if you are looking for a free and easy website that connects to your bank accounts and helps track your monthly income and expenses.
Click to download the budget spreadsheet: free budget template
Step 2: Write down all your monthly bills to include electric, gas, phone, internet, cable TV, car insurance, home insurance, estimated grocery bill based on past months, life insurance, union dues, house/rent payment, landscaping bills, car payment, vehicle registration, credit card minimum payments, student loan minimum payments, HELOC, and any other payments you are required to make on a monthly basis. If you pay your insurance every six months or yearly, divide the total payment by 12 or 6 and include it in your monthly expenses. Now that you have all those required payments, you need to think about those other expenses that come up on a monthly basis such as household items to include: tooth paste, deodorant, shampoo, haircuts, gas for your vehicles, necessary clothing items that may need to be replaced, etc. These items can be combined into one section labeled household or personal hygiene etc. I know, I know, this will be a tedious process and will probably take everything in you not to abandon it, but please believe me when I say that the first month is the most difficult. If you stick to it and get it all down on paper, amending it in the coming months will be much less time consuming.
Step 2 continued: Finally, when you have everything written down that you can think of, (trust me, in a week another monthly expense will come up that you forgot about) add them all together and compare your income to your expenses. This may be the first time you have ever seen how much you actually spend in relation to how much you bring in each month. I realize this may either be an, “oh crap” moment or a, “hey that’s not too bad” moment, but either way, we are still not close to what you really spend each month. We haven’t included how much we spend on entertainment and other variable expenses. This is just a starting point.
Step 3 – Strategy: In order to avoid future debt, you should have at least $1,500 – $2000 in an emergency savings. Do you have $1,500 in your savings account in case of an emergency? If not, you need to make the minimum payments on everything until you save up this amount in a separate savings account labeled, “Emergency Savings.” This is paramount to keeping you out of more debt.
This would be a great time to start looking at your expenses to see what you can cut out. Try writing “needs” next to your expenses, and “wants” next to the others. Is cable TV a need or a want? Let’s be honest with ourselves. I’m not saying you can’t have cable TV, I’m saying let’s honestly identify what we spend our money on and come back to it. Do you really need that $150 a month cable TV package for the 5 channels you actually watch? Why don’t you go without it for a couple of months to see if you really miss it. I have an antenna in the attic and subscribe to Netflix. I don’t miss cable at all and I’m glad I cut the cord.
The idea here is, on paper, to cut out all of your wants and start with your needs. If you do this and have a substantial amount of money left over from your income, you can add a want or two so you don’t lose your sanity each month. But remember, the focus is to get that emergency savings up to $1,500 – $2,000 as quickly as possible so you can finally get the ball rolling to get out of debt. If you decide to eliminate all wants until you get that emergency savings in place, I applaud you – that’s exactly what I would do. If you have little to no money left after your needs, it may be time to downsize your house, sell that truck that costs you $700 a month, or the boat that sits in the garage. This is about being honest with yourself. You make monthly payments on stuff you don’t really need.. The idea is to get as bare-bones with your expenses so you can add things that really add value to your life.
Step 3.5 – When you get the savings in place, the next step is to attack your debts. I will write another article in the near future fully expanding each step. Again, this is an overview of the budget process. There are different strategies to paying off debts. Some suggest paying off the debt with the highest interest rate and others suggest paying off the smallest debt first and moving down the line. Paying the highest interest rate makes the most sense mathematically but not psychologically. Paying the smallest debts first has been shown to keep people enthusiastic and to help avoid losing hope or motivation. Again I will discuss this in a future post. Either way, pay off one debt at a time, which means, make the minimum payments on all the others and attack the debt you are focusing on. For more information visit my related article, Simple Steps To Start Your Debt Free Life!
These are the first steps in the budget process. You need to decide where you are going to spend your money each month. If you allocated $600 for groceries, then don’t spend more than $600. An easy way to avoid overspending is to take $600 out in cash each month and when the money is gone, it is gone. Credit cards make it too easy to overspend. Swiping hurts much less than handing over cold hard cash.
Step 4: Building your future
After your debts are paid, this is when you will begin investing. This will be discussed in a later article.
As you start this process, for your own sake, please be diligent. If you’re serious about taking control of your life and changing your future, start making some major cuts to your expenses. The truth is, you’re bleeding. Some of you may be hemorrhaging money. It’s time to stop the bleeding. It’s time to tell your money where to go and to stop losing the battle to marketing schemes and on stuff you don’t need. You can win this war – I promise. I will walk with you, please feel free to reach out to me for encouragement!
Have you used a budget before? Why or Why not? Comment below, I would love to hear your thoughts! If you haven’t signed up to receive future articles by email, please add yourself at the bottom of this page. If you have topics you would like future blogs about, let me know and I will add them to the agenda. Stay safe my friends -you work too hard to be this broke!