Welcome to our Budgeting Series!
Wait!! Don’t hit that back button just yet. You know deep down inside that you need a budget. Right? Right! So let’s make a deal.
My part is to write the following four part series with the promise that each segment will be short and simple:
Part 3: Nuts, Bolts and Tips for Your New Budget
Your part is to read the series and give budgeting a try. After getting your budget up and going, you can always go back to your current method of mismanagement if you want, but my guess is that you won’t want to.
Fair enough? Great!
Now: Nuts, Bolts and Tips for Your New Budget
Congratulations! You have taken the plunge and decided to make your money behave. From Parts One and Two of this budgeting series, you have realized the pitfalls to avoid and you are excited about the many benefits of your budget. But how do you actually do a budget?
These four steps are the nuts and bolts of your new budget:
1.Establish your goals.
Do you want to get out of debt? Build an emergency fund? Save up for a down payment for a house? Unless you have goals, your budget is simply an bookkeeping chore. Uggh! But once you set those goals, your budget becomes THE tool which helps those goals become reality.
2.Run the numbers.
Stated simply, you add up all of your monthly take home pay and subtract all of your monthly expenses. If you prefer using spreadsheets, you can download this free Excel budgeting spreadsheet supplied by Christian PF or pick one of 10 Free Household Budget Spreadsheets. If you prefer paper and pencil (emphasize PENCIL…with eraser), you can print out these free Budget forms from the Dave Ramsey website. The key is to include all expenses; these forms will remind you of items you might have otherwise neglected.
3. Look at your bottom line.
If you are like most “normal” people in America, you are spending more than you earning. But look at the bright side: if “normal” means broke, you are on your way to becoming weird…in a good way.
At this point, think back to those goals you set in Step 1. If, for example, your goal is to pay an extra $300 a month on your debt, you will need to change your budget (and your life) to create that positive cash flow.
4. Making those changes.
This is the tough part. If I am sick physically, I want to know exactly what is wrong with me so I can know what I am facing. Don’t you? Your budget, which has zero bedside manner, just told you the raw truth. But this is good, because now you know what you are up against.
So how do you go about making these changes? Some items (house payment, car payment, utilities and groceries) have little or no flexibility, so you will need to slash discretionary expenses such as eating out, vacations and entertainment. Remember to make your goal a non negotiable (you might even have that amount direct deposited into another account) and force yourself to live on whatever is left. Are you starting to see how your budget helps you meet your goals? Good!
Now for some tips:
If married, work together.
I can’t emphasize this enough. Abraham Lincoln and Jesus were both right: “A house divided against itself cannot stand.” When one partner budgets while the other sabotages the budget, both can expect trouble. If you are the one who wants a working budget, I suggest broaching the subject by asking your spouse what financial goals are important to him/her. Leave the numbers (and the word “budget”) out of the discussion until you agree on some goals.
Give it some time.
A working budget is more of a process than a document. The process will not be perfect the first month, but it will improve with time. The more realistic your expectations, the more apt you will be to stick with it.
Don’t forget those “extra” checks.
If you and/or your spouse get paid weekly, you will receive an “extra” paycheck (five instead of four) four months each year. If you get paid bi-weekly, that extra check will come twice a year. That money will disappear unless you give it a name, so I suggest obligating it for expenses that don’t come due every month, such as automobile insurance, homeowners insurance, property taxes or Christmas. Set up a separate checking account and deposit those checks into that account so the money will always be ready when you need it.
Depending on just how irregular your income is, you will need to establish a “hill and valley” account to store up money in good months which will tide you over in lean months. Read “How to Successfully Budget for an Irregular Income” for a step by step approach.
Using cash envelopes for items that are difficult to track (groceries, eating out and gasoline) is, in my opinion, the best tip for forcing a budget to become reality instead of theory. My wife and I have used the envelope system for years and we absolutely love it. Read more in this post: Envelopes:The Glue That Holds Your Budget Together.
Hey! I am proud of you. The decision to live on a budget is one that will change your life for the rest of your life.
You will never, ever look back.
Readers: What would you add here? What tips have helped you maintain a working budget?