I am an oddity in many ways. I prefer wearing my socks inside-out, I live in one of the coldest places in America and I don’t own a winter coat, I read text books for pleasure and I love writing and implementing budgets. Perhaps it’s because I actually do get joy out of it that I am good at it, maybe it’s just something that makes sense to me, in any case this post is going to cover the Why and the How of making a budget and sticking to it.
Why Have A Budget?
I’m going to make a statement here and you can hold me to it:
Everybody can benefit from following a budget in their daily lives.
Creating and sticking to a budget can be one of the most daunting tasks one can undertake in the financial realm. A properly formatted budget, in my opinion, is probably the most important beginning step in being a fiscally responsible adult. Check that, a fiscally responsible human. I think parents should begin teaching their children budgeting as soon as the concept of money takes root in their little heads!
Notice a key word in the first sentence of the preceding paragraph. Can… Creating and sticking to a budget CAN be one of the most daunting tasks one can undertake in the financial realm, but it doesn’t have to be daunting at all. My aim is to help you simplify the entire process and make it as seamless and painless as possible. Before we get too far in to things, let’s take a look at potential benefits of having a budget in place in your life.
• Having a budget will relieve stress
• It will take the thinking out of paying bills
• No more juggling finances or running out of money before the month is done
• A budget is a key factor in eliminating debt and creating wealth
• Following a budget will assist you in developing and reaching financial goals
• You will become aware of where all your money was going and where it IS going
This list goes on, of course, but I think the above points illustrate the advantages of having a budget pretty well. Can everybody really see benefits with a budget implementation in their lives though? I am certain of it. Budgeting fits all income levels, all ages and all lifestyles and with the proper approach it can be very, very simple. Keep in mind though, there is a major difference between easy and simple. I say this because for many of us, paying attention to where our money is going, changing our spending habits and beginning down this road can be a bit of a shocker. Definitely a wake up call! So what do you do? Read on.
Define Your Income And Set Your Budget Length.
If you’re salaried, the income is remarkably easy to figure out because it’s fixed. For budget length, the most common and easiest to manage is one month, seeing as how most bills occur monthly. Let’s make up an easy example. Let’s say Imhotep makes $50,000 per year. Factoring in taxes (again, let’s keep this an easy example, taxes will be 25%) that means Imhotep makes $37,500 per year, net. Take Imhotep’s net income and divide it by 12 months and boom, he is bringing home $3,125 per month.
What if Imhotep is not on salary? What if he is an hourly employee? What if he lives off of tips? The same concept as we covered above applies here, too. The point is that you must define how much money you’re earning over a period of time. I’ll leave this to you to figure out.
Define Your Expenses…All Of Them
You’ve got your obvious expenses like rent, your cell phone, car payment et cetera. But what about when you stop for gas and you run inside and get a two dollar Monster? That’s an expense. A dollar in a parking meter. Expense. Every single cent you spend is something that should be accounted for in your budget, especially when you’re first starting out. I recommend that you try a couple months of expense tracking in the beginning. This is a simple way by which you’ll really find out where your money is going. There are a few ways you can do this.
• Make an expense tracking sheet. This is a simple grid with one column for the date, one for the item(s) purchased and one for the amount spent. Write down or enter in to your computer every transaction over the course of a month and you’ll begin to get a picture of where you’re spending all your hard earned cash.
• Pay for everything with a check card. Most banks offer end of the month reports that will be (or can be) categorized for you making it very convenient to see where you’re spending.
• Use budgeting software like Quicken or Mint. These programs achieve the same goal; telling you where your money is going.
No doubt, doing this takes some dedication but the payoffs are really very worth the time and effort you’ll put in to getting going.
Define Your Payment Schedule And AUTOMATE
You’ve got some constants in life: You grow older, time moves forward, change is inevitable and rent is due on the first (sometimes with a few days grace period). With the help of a bit of historical data you can tell when all your bills are due. Rent, gas, electric, cell phone, car payment, car insurance, health insurance, student loans, credit cards… these are all due at certain times of the month. Plot when these are due on your calendar so you can know exactly how much money you’ll need and when in the month. For bills that are the same month in and month out, use your bank’s bill pay or set up some sort of automatic payment system through the company being paid. I prefer automatic bill pay through my bank because it puts all of my bills in one location and it doesn’t cost me anything at all. Some companies will charge a fee for automatic payments which I find absurd and I wouldn’t recommend that if you’ve got a free alternative.
At this point you’ve done a few momentous things! You’ve identified exactly how much money you are bringing in, exactly how much money you are paying out and for that money you are paying out, you’ve set it up so you don’t have to think about paying it. All you have to do is make sure you keep keeping an eye on your spending so you have the required funds in your account for everything to clear when it’s supposed to.
Build In A Checking Account Buffer
Every step in this process requires a bit of time to integrate in to your life and step four is no exception. You’ve got as many bills automated as you can and you’re being mindful of where and how you’re spending your money but you’re still checking your payment calendar versus your checking account balance at various points in the month to make sure you’ve got enough stashed away for your student loans being processed on the twentieth. Finances are still on your mind, but not how they’re supposed to be on your mind. Step four is the last step in making your budget worry-free. You are going to build in a buffer. Are you used to letting your checking account run down to a hundred or two hundred dollars or even lower on a regular basis? Well, I suggest that you figure out an absolute minimum that you’re going to let your account reach from this point forth. This amount will vary by person and situation, for example my number is one thousand dollars. $1,000 in my checking account is the lowest that I ever want it to go and as my financial situation changes over time, so will that minimum number.
Why? What is the purpose of this? Well, as we stated at the end of step three and the beginning of step four, your bills are automated but you’re still being careful to make sure you’ve got enough money in the bank when they’re supposed to be processed. I want this concern to be out of your mind, freeing up your valuable time and energy to focus on other, more important things! You’ll know that you’ve got your bills set to be processed when they’re due. You’ll know that you’ve got more than enough money in your account to cover every bill that is being processed for the entire month. You’ll know that you don’t even have to think about it! That is a pretty awesome feeling!
Invariably, my friends and family who I have helped set up budgets have had a difficult time adjusting to it. Those who were willing to accept these changes stick with them to this day and swear by them. Each step along the way takes time to integrate in to your lifestyle and tweak so it makes perfect sense to you. I urge you to really take your time so you can free your mind from your finances. It’s incredibly liberating when you finally get to the point where your own personal financial bubble is running itself.
Share your stories about this, or other methods of budgeting via comments or email!
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