Start Your Financial Transformation with a Budget!
A Budget Tends to Find Money!
Have you ever lifted up a couch cushion, and been pleasantly surprised to discover a few coins. You just found 45 cents!! Or what about when you reach your hand into the pocket of that jacket that you rarely wear, and you pull out a stack of singles – 6 whole dollars! A budget can do just that! If you’ve never done a budget before, trust me when I say, “It’ll be just like finding money!”
Finding money is exciting, and we all love when we come into some extra cash to spend.
Before we get into the how-to of budget making, let me tell you why you need a budget.
Aside from finding money, you may think that to get some cushion in your finances that you just need more money, via a raise, or promotion, or second job, inheritance, or winning lottery ticket. Chances are, if any of these things happen to you, and I hope they do, you still will need a budget. You see, without a budget, you don’t actually know how your money is spent. When you get more of it – you still won’t know how it is spent.
Granted, budgeting is work, but it’s not difficult. There are multiple apps out there to help you. Mint, Personal Capital, Every dollar, to name a few. I personally use Quicken. It’s a bit more powerful than those I apps I just mentioned, but the functionality we’re discussing is the same. You need to be able to keep track of what comes in – income/paycheck, and what goes out – bills, groceries, etc. It isn’t enough to know your checking account balance. It also isn’t enough to track your spending, you need to also PLAN your future spending.
Note that I was able to cut my spending IN HALF just by implementing a budget. That’s crazy to me. I didn’t think we were out-of-control spending. I mean, we were living within our means. We just weren’t doing as well as we could have.
The best place to start budgeting is with two categories of expenses. The first, and most important, is your necessary expenses (things that you have to pay).
- mortgage/rent – $1050/month
- electric – $150/month
- water/sewer/trash – $100/month
- cell phone – $120/month
- cable/internet – $100/month (could be considered discretionary)
- gas – $120/month (this is approximately filling my gas tank 3 times per month – or once every 10 days)
- car insurance – $100/month
- food – $520/mo = $120/week x 52 weeks / 12 months
Total – $2260.00
You may have a few other things that would be considered necessary expenses. The key is to make sure you cover all YOUR bills. Allocate an amount of money to each expense as I did above. The numbers allocated to each expense may vary also.
The second is called discretionary expenses (things you could do without, or don’t spend money on every month). Examples of discretionary expenses are: clothing, vacations, dining-out, and “toys”. This is the area that can be the hardest part of the budget.
Sometimes we have trouble deciding which category of expense a certain item is. Ask yourself – do you really need it? This category can also change month to month – depending on what things come up.
- dining out – $100/month
- clothing – $100/month
- vacation – $200/month
- savings – $200/month
- misc – $50/month
Total – $650.00
Now the income side: this part is easy – most people know their income.
Let’s assume you make 55k a year (national average). That works out to about $3300/month. Keep in mind that these numbers aren’t exact. The goal is to have more money on the income side than the expense side.
Once all your necessary expenses have money allocated to them, subtract that total amount from your income. In the example above, we have $3300 – $2910 = $390. In this case, I would recommend that you save the left over money ($390).
Because a budget is a plan, you have to stick to it. Otherwise it won’t work. Where most people get into trouble is: they spend money in the discretionary expenses category before planning what they need to cover their necessary expenses. This can cause late payments, falling behind on bills, and overdrafts.
Doing a budget can open your eyes to your financial situation. It can also show you expenses or categories that are way out of line. For instance, in the example above, if the mortgage/rent was $2050/month, we would only have $40/month for discretionary spending. This is signals an imbalance that needs correction – either more income, or lower mortgage/rent. It really is that simple.
For most people, they don’t know what they don’t know. Knowledge is power. – right? Once you complete your first budget, you start to take control of your finances. You’ll either find money or realize where changes need to be made.
Great job! Now keep it up, and remember to keep your expenses lower than your income.
So what about you? Do you have a budget, or do you just “wing it”?
Let me know in the comments and thanks for reading and sharing!!