Welcome to week one of the budget boot camp! We’re starting simple and working on learning the tenets of an effective budget and creating a draft budget that we will tweak and perfect over the next nine weeks.
More importantly, we’re going to be making the decisions about where our money is going instead of wondering where it went when we come up short at the end of the month.
Budgets are quite simply the total of your income minus the total of your expenses; if your income is insufficient to cover the cost of your bills and expenses each month, you’ll either be dipping into savings or credit by the end of the month, or be going without when the money runs out. Income you should include in you monthly budget should include gifts and tax rebates, etc., however don’t include these items when you are planning your budget as they are not regular. When considering expenses, you should be including your monthly bills, fluctuating expenses such as groceries and gas for your car, as well as savings, giving, and savings for abnormal expenses as well (to be discussed more next week).
A budget is a guideline to direct where your money is going each month, and it is up to you to make sure you are setting realistic amounts in your budget that your family can stick with. If your family can’t living on $200 a month for groceries and you set that as your monthly amount, you’ll only end up going over and borrowing the money from somewhere else. Chances are you’ve done that once or twice already and the result has been using the credit card a little more that month.
If you already have a budget, consider how well it’s been working so far. Are you able to stick with the amounts you’ve written down? Are you maximizing how much you put into savings each month without sacrificing the things you love?
Zero Balance Budgeting
Like I mentioned earlier, if you’re not designating where each dollar will go each month, chances are you’ll come to the end of the month scratching your head wondering how you’re in your overdraft and have nothing to show for it.
If you create a zero balance budget (exactly how it sounds; your expenses and income should be equal, resulting in a zero balance), you are giving a name to every dollar you make, giving you the power over your spending. It also means that when you’ve run out of money in a certain category (for instance entertainment), you either need to go without until the next pay check (not ideal for categories like groceries), or ‘borrow’ money from another category. Creative planning and LOTS of restraint will help the money to stretch further, and over time you can adjust the categories to better reflect your spending.
Steps to a better budget:
1. If you have time, spend a few weeks or months tracking your spending. If you need a budget immediately, use your bank statements and past bills to compile an average for your spending and break it down into categories.
2. Make a list of all of your bills and expenses (i.e. groceries, gas, personal needs, sports or fitness memberships, etc.).
3. Using a budget worksheet (see below), write down all of the NECESSARY expenses first, such as mortgage payments, car insurance, and groceries, followed by your other expenses.
4. Next, add in a line for savings. Typically this should be at least 10% of your income, but designate whatever you can.
5. Compare your total expenses to your total income. Are they equal or do you have a surplus? Great! If not, you have two options:
a. Cut back on some of your expenses.
b. Generate more income
6. Start by going through your expenses and figure out if there are any bills your can reduce or eliminate. Maybe you can go without cable or change to a cheaper cell phone plan. In the next few weeks we’ll go over more ways for you to reduce your spending and get creative about saving.
This weeks challenge:
Create a zero balance budget for your family using the above steps. If you are married, include your spouse in this process as it’s a lot easier to stick to a budget if your partner is on the same page – especially since you can keep yourselves accountable!
Once you’ve done this or if you already have a budget, start considering the budget categories where you can make some immediate changes to to slash your spending and start directing more to debt reduction and savings.
Create a jar or envelope system for your discretionary spending categories (see bottom of post). For instance:
- Groceries $200/month
- Transportation $300/month
- Personal Care $50/month
- Miscellaneous $50/month
- Kids Allowances $40/month
- Entertainment $200/month
Next week we’ll focus more on budget envelopes and creating a system for tracking your spending throughout the month.