Budget Doesn’t Have to Be a B Word. It Can Have Any Name You Want.
So budgeting doesn’t have to be a B word after all. That’s right. I don’t know about you, but the word budget tends to bring up negative connotations in my head for some reason. However I understand and believe how important of a financial tool the budget is, so instead of canning the budget altogether, I’ve chosen to re-brand the budget. I recommend the same for you. I suggest naming it anything that makes you feel enthusiastic and motivated vs. deflated and pessimistic when you look and work on it.
I call mine my Abundance Plan because that motivates me and well, just makes me smile. Call your budget whatever does the trick for you. Go wild with your imagination. There are no rules. It’s whatever speaks to you and brings you empowering thoughts and feelings. After you name your budget, just make sure when you are saving your budget electronically or labeling anywhere else to title it what you want it to be called. This way when you pull it up, you will get that hit of enthusiasm and motivation right from the jump, instantly putting you in that positive mindset.
The Bones of a Budget
For simplification reasons, I will still use the term budget for this article. Let’s first talk about the actual bones of a budget. There are quite a few theories on budgeting out there. I personally believe in the zero based budgeting model. I find this model to be the most effective for achieving your financial goals which is what we want to do. I believe it’s a fairly simple model to follow once you have it set up.
What is Going Out?
First off, you have to know what you are spending. Sorry, there is no getting around this one. This needs to be broken down very specifically into a minimum of 10 to 15 categories, often times more depending on the complexity of your financial situation and how far you want to drill down.
Use the last 3 months as a measurement for month to month expenses and then take an average of the 3 months. Many financial institutions allow you to download your expenses into a budgeting tool which will break down the expenses into categories for you. But if this is not an option, you’ll want to do this manually. Some category examples are housing, utilities, insurance, food, gas, childcare, entertainment, education, charity, etc.
Make Friends with Budgeting Tools
There are many easy budgeting tools out there offered for free by financial institutions. There are also excellent budgeting programs and apps for your phone out there that integrate with your financial institutions. Mint is a big one that people love. No matter what tool you use, identify the expenses for 3 months. Average them if need be and then put the calculated number in each appropriate expense category. Finally total up all of your expense categories to get the total average monthly expense amount.
Leave No Stone Unturned
Remember, your expenses should account for every dollar spent. So leave no stone unturned here. If you spent or regularly expect to spend money on something, it must be accounted for in one of the categories. If you pay for something once seasonally or annually, divide the amount by 12 to get the average monthly expense.
If you are already putting money towards savings accounts or other investments, great job! This should also reflect on your budget with appropriate labeled categories. You could have categories labeled with examples such as IRA, Savings, Kids Education Savings, etc.
Identify Your Income
Next is identifying your average monthly income. It is easier to go straight to net income here, which means after good old Uncle Sam takes his cut. How much are you actually bringing home per month?
You Know I Love Calculations
To get the dirty lowdown on this number, take out your most recent paycheck stub. Look at your year to date net income and then look at the end date of the paystub.
So let’s break this down and use the following example:
Your paystub end date is September 15th with $50,000 net income amount. First you would take 15 divided by 30 days in a month to come up with .5. (because you are half way through September). Then since it’s the month of September and there are 8 months prior, you would add 8 to .5. So you are 8.5 months into the year on a year to date net income of $50,000. So $50,000 divided by 8.5 = average monthly income of approximately $5882 per month. Type this average monthly income on your average monthly income box of your budget. Wha-la.
Bonuses and Commission Income
Let’s talk about a couple nuances here. If you get paid an annual bonus, deduct that from the calculation. Or if your bonuses or commissions are not consistent or reliable, deduct those from the average monthly income. So for example if the $50,000 year to date net income on your paycheck stub includes a one-time bonus of $8000 that you got in March, deduct it from the $50,000. So the new calculation is $42,000 divided by 8.5 = approximately $4941 average monthly income. That’s almost a grand a month difference, so make sure to take bonuses and commissions into careful consideration. If you are not consistently receiving this money, think hard about whether you can consistently budget from this money.
What About My Partner?
Second note on income. If you have a partner that you consistently and reliably share income and expenses with, then do all of this including the expenses and income for your partner as well and merge into a single budget. So factor all of your partner’s expenses into the same appropriate categories. Then for the income, do the same process for his or her income and add both incomes together for one total average monthly income.
Do They Equal Each Other?
So you’ve got your expenses broken down by category and you have your total average monthly expenses. You also have your total average monthly income. Now take Your total average monthly income minus your total average monthly expenses. Do you have a positive number, known as a surplus? Or do you have a negative number, known as a deficit? You need this to be a zero, meaning you need these to equal each other.
Pay Yourself First
It doesn’t matter if you have a surplus or deficit, I am a firm believer in the practice of paying yourself first. This is a long-standing part of my mindset on money that has served me well. I pay myself first with automatic transfers set up weekly to come out of my income sources into my desired savings and investment accounts before I even see that money.
Don’t save what is left after everything else. Save first and then start with everything else. That is what pay yourself first means. Because if you wait to get the crumbs at the end, first of all there may not be any left. And second, why are you working so hard and settling for possible crumbs anyway? What is that about? Pay yourself first.
Set It Up on Auto Pilot
This is easiest when set up on auto pilot. Based on what goals you are trying to achieve, set up automatic transfers either directly from your paycheck or your account the same day your check hits your account. You can set up as many as you want to based on your goals. Want to save for your child’s education? Maybe set up an automatic transfer to a higher education account with tax benefits. Want to build up your retirement nest egg? Set up for all your appropriate investment and retirement accounts. Wanting to build your emergency fund? Set up automatic transfer to a savings account. Trying to do all of the above? Good for you! There are no limitations. Even if you have to start small and work your way up. You can do it!
For those of you with a surplus, congratulations! You have extra money you can be investing and saving to accomplish your goals. If you don’t have goals, go back and read or listen to the podcast on Goal Digging. You can slice up your full surplus to pay yourself first categories and then set up the transfers; or you can take a portion of the money and increase your expenses in the loan areas to pay off certain debts faster if that is your goal. This should be based on your goals and priorities of what you want to achieve. Whatever you decide, make your income equal your expenses.
Turn that frown upside down. This is the exciting part. Uncovering the mystery of why you are off balance and solving the puzzle once and for all. There is either an income issue or an expense issue. You are now the forensic accountant designated to figure out what is the culprit. If it is an income issue, then you’ll have to work out how to make more income. You are a smart person, figure out how much more you need to make. Brush up on some skills if you need to. And make it happen.
Drilling Down on Expenses
Let’s cover the expense issues. If your expenses are too high, start drilling down into those categories. Hopefully you’ve already added the pay yourself first categories into the budget because you’re setting up those transfers and having them be part of the budget. So we know we don’t want to cut out the pay yourself first categories. You can consider reducing if they are crazy high amounts. However elimination is not an option in my opinion. I think 20% should be your ultimate goal for this category, but starting small is good. Can you start at 10%? Either way, just start. That is the most important thing at this point, just start.
As far as the other expenses, what else can you cut? What looks too high? Are you paying too much for cable or your cell phone bill? Are you eating out too much or shopping too much? Are you visiting the salon too much? When is the last time you shopped around for insurance quotes? Are you getting too many expensive lattes? Can you refinance or consolidate any debt to get the payments down if that category is high? If you have high payments in the loan categories, I would definitely advise talking to a financial consultant at a bank or credit union to see how they can help you.
The goal is to to get the expenses down or the income up or both so they equal each other.
The Budget is a Living Document
So that’s the budget, but the budget isn’t a one and done. This is a living and breathing document that needs to be looked at and managed regularly. When expenses or income changes, so does the budget.
I also recommend keeping track of your financial goals and loan balances on your budgeting plan. I do this on my abundance plan, and it’s very exciting to see things pay off or savings grow. Budgeting is a foundation of financial success, but it doesn’t have to be boring or stressful. It can be done in a motivating way that works for YOU. The most important thing is to have one to take the reigns over your finances.
As the great budget master himself Dave Ramsey has famously said “a budget is telling your money where to go instead of wondering where it went”. Well isn’t that the truth! Don’t let this happen to you. Create your budget today and start telling your money where to go.
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