Many people cringe at the thought of a budget as it raises mental images of not being able to go anywhere, do anything or have any fun. A budget seems to convey the feeling of restrictions and lots of record keeping.
However, a properly designed and maintained budget gives you freedom rather than restrictions, especially if you think of it as a spending plan, not a budget.
Instead of your money simply trickling through your bank account each month, a budget allows you to actually plan where your money goes—you are in control. It gives you the freedom to decide what is important to you, both long and short term, and then use your money for what is most important.
Most people struggle with how to set up a budget and they often start by estimating how much they spend each month, which creates a lot of trouble. How much we think we spend is usually much less than what we actually spend.
By following the ten simple steps below, you can create a budget based on reality and you will be much more successful.
STEP 1 – Before even trying to create a budget, track all your spending for a minimum of 30, preferably 60 days. Track every kind of spending you do, using cash, checks, credit cards, debit cards and auto pay accounts.
To keep things simple, start by using one of the two following methods:
1. Pencil and paper. Many people prefer using paper, to begin with. This is a good start as it helps you think through how you actually spend money and when you decide to use a more sophisticated process what you learned using paper and pencil will help you choose the appropriate software.
2. Spreadsheet. If you are a whiz with spreadsheets, you may want to start budgeting by using a spreadsheet. The Compass Catholic website has spreadsheets you can access by clicking here.
STEP 2 – As you track your spending, categorize it into different areas. The following categories are typical: Saving; Housing; Food; Transportation; Clothing; Medical & Health; Education; Personal; Entertainment & Vacation; Debts. Details for suggestions on what belongs in each category can be found here.
STEP 3 – Look at last year’s bank statements and credit card statements to find those items that only occur quarterly or yearly. Divide the amount of the payment by how many months the payment covers to determine a monthly amount. If a payment is due quarterly, then the payment should be divided by 3 to calculate a monthly amount. If the payment is due yearly, divide the payment by 12 to determine a monthly amount. If your car insurance is paid annually, you need to save money each month so when the annual payment is due you have money set aside to cover it. Another example is Christmas, money should be set aside each month to cover Christmas expenses. Failing to do this is a big budget buster.
STEP 4 – Calculate your monthly “Net Spendable Income.” This is not the same as your salary. It is the amount of money available for you to spend each month after you subtract all the deductions (Income Tax; FICA [Social Security and Medicare]; Employer-provided insurance, 401K or Retirement plan, etc.) ALSO, subtract your giving at this point—giving comes from your first fruits, not your leftovers. Using your gross salary instead of your net spendable income is another big budget buster.
Step 5 – After tracking spending and income for a month or two, subtract your average monthly spending from your average monthly net spendable income and determine if the number is a negative or positive.
Step 6 – Make adjustments to eliminate the deficit or surplus based on the results of Step 5.
A positive number means you have money to save toward an emergency fund or long-term goals such as buying a home or car, retirement or funding college. If you have not been saving and you don’t have any extra money at the end of the month, you missed recording some expenses.
A negative number means you are spending more than you are making. If you find yourself in this position, you need to take action by either spending less or making more.
The good news is that you now have real data to use in analyzing where adjustments to your spending can be made.
Step 7 – Set up a long-term process for your budget by selecting one of the following.
1. Budgeting software. Good user-friendly software programs are available, such as Quicken, or Microsoft Money. Once you have a handle on your spending using a manual process, you can explore the software options and find one that works best for you.
2. There are tons of apps available. Our recommendation is to look at the following: Mint; PocketGuard; You Need A Budget; Good Budget; Mvelopes; Home Budget; Wally; Level Money; Spendee;BUDGETT; Unsplurge; Why You Need a Budget. Each of them is similar, but different.
Explore each one and find one that works for you. The best app will allow you to enter your own categories, define your own budget amount and enter your spending. It also helps if the app is connected to your bank account. Be sure you can look at multiple views of your spending, both in total and by category. The key is to find a system you’re comfortable using. And then use it regularly.
Step 8 – Make it a habit. Once you get a good process in place, make budgeting a habit of recording. Recording your income and spending at least once a week enables you to stay current with your finances..
The good thing about using a spending plan is that it doesn’t require endless hours of bookkeeping. It shouldn’t take more than an hour of your time each week. Being diligent with your budget is a small price to pay to stay on top of your finances.
Step 9 – Review on a regular basis, which will allow you to quickly discover any issues. You (and your spouse if you are married) need to review the spending plan at least weekly to start out. After you become more comfortable with the process and find you are staying on track, make the interval between reviews longer. When you are a long term budget user, the reviews can be monthly.
Step 10 – Overhaul your budget when life changes occur. You might have a new child, change jobs, pay off a lot of debt, move to a new location or retire … you’ll be making adjustments due to major life changes as long as you use your spending plan. Anytime one of these life changes occurs, the spending plan will need a total review and update.
Once you establish and use your budget you will see how freeing it can be. “The plans of the diligent end in profit, but those of the hasty end in loss.” (Proverbs 21:5)
For more information, listen to Compass Catholic on BreadboxMedia on Saturday 8/27 at 9:00 am where we talk about creating a budget and leaky budgets.