It is a new year (or at least pretty darn close to it) and common resolutions deal with quitting smoking, losing weight or getting organized. Another common resolution is to get a better handle on your finances. The problem is …. Where do I Start? Should I clip coupons for my grocery visit? Should I get out of debt? Do I need a budget? The answer is simple – YES. However, you can’t just jump in with both feet and do all 3 at the same time.
Over the next several weeks I am going to do various posts to help you all get all 3 areas under control. Now, some of these may seem like repeat posts and are, to some extent. However, there are a lot of you who are just getting started and some of you probably would appreciate a repeat course just to make sure you are on track.
Before you can even think about saving money at the store or trying to get out of debt, you have to use that horrible “B” word. Dare I say it— budget! Gah! No one likes to be on one. It is not fun, but it really is necessary. It is very important to know where your money is going every month. When you set up a budget, you control your money instead of your money controlling you. Isn’t that a great idea?
Knowing how to get started can be overwhelming – especially if you have never used a budget before. You are probably wondering - how in the world do I even get started? So, we are going to start very simple and work our way into this, okay? Here we go!
First of all, I have set up a spreadsheet that you can refer to as a sample, or you even copy and paste it, to help you set up your own budget. You can access it right here.
STEP 1
Make two lists of where your money goes every month; one will be your necessities (i.e. shelter, food, etc.) and the other will be luxuries and/or debts (i.e. dining out, credit card payments). To help you, here is a basic list of necessities. Keep in mind yours will probably vary from this and you will need to adjust it to meet your family’s needs:
- Home/Apartment (i.e. Mortgage or Rent)
- Utilities (i.e. gas, heating oil, electric, gas, water, telephone, cable)
- Vehicle Payment(s)
- Insurance (auto) Include health only if you pay for this out of your pocket after payday
- Auto Fuel
- Savings (for taxes, holidays, etc)
- Groceries (includes food and toiletries)
- Clothing (adult and child)
- Medical/Health (includes monthly prescriptions)
- Hair Care
Some luxuries and debts might include:
- Dining Out
- Entertainment
- Vacation
- Credit Cards
- Unsecured Loans
- Blow (money spent on whatever you want each month)
If you can’t remember everything, just look back through your checking account, bank statements, credit card statements, etc. so that you don’t leave anything out.
STEP 2
Now that you have your lists completed, we are going to figure out what your budgeted amount should be for each and every item. First of all is to find the average amount you pay towards each bill every month. Look back at the past three months of bills and average the amount you spend to determine this (add up the total spending of each item over the period of time and divide it by 3). Subtotal each sheet and then add the two together - this is the amount of your monthly expenses.
Now, before you just decide – I don’t need to eat out or I never buy clothes – don’t eliminate those items. Trust me, you’ll have money going there anyway and if you don’t have it in the budget, you will kick yourself later on. Just account for it all.
STEP 3
We are now going to figure out how to make adjustments to your budget so that the total of your monthly income equals the exact amout of your expenses. Here are a couple of examples to help you determine how to make adjustments on your sheets.
Example 1: Total of your budget sheets is $2,000 and you bring home $2,500 monthly - so money is "left over". If this is the case, go back into your sheet and increase debt payments until the total of your sheet is equal to your monthly income. If you have no debts, increase your savings, groceries or something until the sheets equal your monthly take home pay.
Example 2: Total of your budget sheets $2,000, but take home pay is only $1,800 - so a "short fall." First of all, don’t panic. This is why I had you do two sheets. Look ONLY at the necessities budget. If this amount is less than your take home pay—you are just fine! You need to adjust down luxuries until the total equals your take home pay. I recommend that you do not decrease debt payments and begin with luxuries such as dining out, as if you have debts you can’t pay, you really probably should just dine in. I know, I know, it will be hard, but I have faith you can do it!
If you can’t cover your debt payments right now, do not fret. I recommend contacting them to see if you can work a lowered payment or a deferment. The economy is bad and a lot of companies are willing to work with people rather than have them declare bankruptcy. Just be sure to get everything you discuss confirmed in writing and document date, time and rep’s name/info when you place those calls (we'll go into details about debt during a later lesson).
If you find that your necessities sheet is greater than your take home pay, you will have to look at trimming unnecessary expenses. Can you downgrade your cable service? Perhaps you have a land line and a cell phone, can you drop one of them? See what you can do to trim the budget so you can actually live comfortably each month.
And what about the fluctuating monthly income? That just means that you will have to revisit and adjust your budget more frequently to account for the changes in your paycheck.
STEP 4
You need to make time to sit down with your spouse, significant other or by yourself once a month and check in. Some months you may know in of upcoming expenses in advance.
For example, maybe you have to out of town for a wedding and will have fuel, dining out and hotel expenses. Those will need to be added into the budget for that month, but then removed the following month. The same would go for an upcoming party or social event that might require you to adjust your budget to accommodate it.
The budget is always changing and adjusting itself as your life changes. It really doesn’t remain static. The moment you leave it alone and don’t revisit it, it will get out of hand and you will lose control again and have to start over at Step 1. Don’t worry – if that happens it isn’t the end of the world – you can do it!
You have already taken great strides in controlling your money. You can see where it is going and are now in control of the outflow of cash from your account. I am sure that some of you probably want to climb under the covers of your bed and not ever come out, but I hope the majority of you feel pretty good.
Budgets are definitely not fun, but, at least you can see it all in black and white. You can’t make any changes to control your financial future until you take responsibility for your finances. So you have made huge strides towards doing that. Pat yourself on the back and—only if your budget allows for it—go get yourself a latte!