July 12, 2009
A budget can be the dawn of a new day...
When we last left our heroes (that's all of us), we had discussed the first step of a budget - figuring out where it's all going now so that you can get control and start meeting your financial goals more quickly by telling your money what to do instead of the other way around.
So if you feel like you've got a good record of your spending over the last month (or months - even better), here's the next steps. I know there's more than one, but take them one at a time and soon you'll be at a place shared by few others - walking around with a working budget! I'm assuming nothing but a blank sheet of paper here, but if you have an empty budget worksheet (which I can send to you - e-mail me at firstname.lastname@example.org), you can follow the same steps:
First, record your monthly income at the top of the paper. For simplicity's sake, let's go with your take-home income (what actually gets deposited into your account or what you take home). If you're paid every two weeks, take one of those amounts and multiply it by two to get your monthly income. For reasons we'll discuss in a future post, it's best to budget this way even though every six months those of you paid every two weeks get an extra check. If you rely on that extra check to pay necessary expenses, leave it that way and make it your goal to live on two bi-weekly paychecks a month. Once you've written this on the paper, take a quick second to give thanks for what you've got coming in! Often we take this for granted. Make sure to include not just employment income but any other income you receive (side jobs, alimony, rent payments, etc.)
Second, take some time to think (and/or pray, if you are part of a faith community) through your financial goals. Look around your financial landscape and ask yourself what you'd like to change if you had the money to do so. Examples might be: creating an emergency fund, saving for a future need, getting out of debt, being able to help someone in a future need they will have, etc. Come up with a list of these - it's helpful to have some short-term goals (things that you can accomplish in two years or less) along with the items that will take longer (saving for college, retirement, etc.)
Third, on the same sheet of paper that you recorded your income, transfer the amounts you've spent per month in your various expense categories. If you were able to record several months of expenses, use the average expenses (not the total). Make sure to think about expenses that don't occur each month (property taxes, oil changes, vacation, etc.) With these expenses, you'll want to think about how much they cost you each year, divide by 12, and record that amount on the expense side of the sheet. You should now have a one-page picture of what you've got "coming in" and "going out".
Fourth, the moment of truth. Before you complete step four, go ahead an grab a seat and have some ice water or a paper bag nearby (if you're prone to hyper-ventilating). Step four is to add up both your income(s) and expenses and see how you're doing, on average. This is important: Do not panic! You've obviously more prone to panic if you look and see that you're in the negative, but the point of this exercise is not to duck reality but to greet it head on, shake its hand, and figure out where you go from here as you attempt to reach your financial goals.
Fifth, whether you ended up in the positive (you have more coming in than is going out), or the negative (the opposite), you are still faced with the task of telling your money what to do so you can better meet your financial goals. Whether you're in good financial shape or are struggling, there are always places in your expenses that you can trim back (we'll discuss these in future articles). Some of these cutbacks involve some degree of sacrifice, and you'll find that the speed with which you accomplish your financial goals is usually tied very closely to how much you are willing to sacrifice and how soon you are willing to do so. Step five is to look at your bottom line and find ways to increase the income you have available after paying your expenses. Usually this is done by trimming expenses, but there are instances where you could increase income as well, just be wise about it (for instance, make sure you don't start working 90 hours a week and ignore your family just to take them on a nice vacation - they'd probably rather have 50 more hours of you every week than a nice vacation).
Lastly, once you have some extra money available after paying your expenses, assign that money to your financial goals and begin setting it aside (in a separate savings account, for instance). One of my friends (who previously had no emergency savings but wanted to save $1,000) changed their phone plan and cut their home phone line and is taking the $100/month in and transferring it to her savings account. After three months (and a $200 bonus from work that she applied to the same cause), she's halfway there! It is slow going, but you'll see the change happen and the longer you stick with the plan, the more results you will see! Try to focus on 2-3 financial goals at most at one time. If you throw a little bit at 15 financial goals you're trying to meet at once, you'll usually get discouraged over lack of progress. Many people find it helpful to get laser-focused and reach for one of their goals at a time, moving on to the next one when they're done.
Obviously, books have been written on how to set up a budget, but hopefully this was a helpful start. We'll discuss other aspects of this and some other helps in future articles, and I am (as always) available via e-mail for any questions you may have - email@example.com. Happy budgeting - the discipline is worth the reward!