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 1: 5 Reasons Your Previous Budgeting Attempts Failed
Part 2: 5 Things Your Budget Will Do For You
Part 3: Nuts, Bolts and Tips for Your New Budget
Part 4: How Your New Budget Will Change Your Life
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.
Irregular Income
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.
Use envelopes.
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?
Great tips Joe – I learned something new today 🙂 I never really considered that extra check before, but now I’ll give it a name. Looks like April, July, Sept, and Dec will have extra checks so we’ll declare it a payday holiday when they come!
Tim,
Hey. I am glad you learned something new!
Those “extra checks” can be even better than you thought. If you obligate them for a non monthly expense, such as Christmas, insurance or property taxes, you can then remove those items from your monthly budget and free up that much money every month to use for something else.
I realize that this is sort of six of one and half dozen of another, but by freeing that money up every month (for many it is $400 to $600 a month), you can better control exactly how it is used.
The plan is always to hide that extra check rolling in, it just never happens to be extra. I always have it spent on other things before we can lock it away. I used to want to use it for an extra couple mortgage payments which I think would be huge in the long run.
I would add to pay particular attention to expenses that change monthly and/or increase such as utilities, gas, food, etc. These are expenses that are increasing right now. i would want a safety margin on those items.
@arbitrage,
I think the key is to make a budget based on never receiving those “extra checks”. After all, that is what you actually live on most months. Then, when those checks come in, they really are “extra”. But, just to make sure they don’t get mingled into your regular spending, immediately transfer the amounts to a separate account that is earmarked for a specific purpose, such as insurance payment.
@krantcents,
You are absolutely right. Budgets must be regularly monitored and adjusted.
The way to make the adjustments for food and gas is simple: put more cash in your food and gas envelopes. So far, we haven’t increased ours; we just eat out less so we can buy more groceries, and are extra careful about how much we drive. Of course, if those envelopes do need to be increased, we would need to decrease other items accordingly.
As far as utilities go, we try to budget enough buffer to handle the fluctuations. They are highest in the summer and winter of course.
The secret to have more extra money is not to spend above your budget. or make an expense tracker to monitor your expenses and to encourage you to save even more.