…The very word sends shivers down the spines of even the most competent people. “Live within your budget,” is the rallying cry for all husbands and wives, congress people and senators, bosses and financial advisers. There’s the household budget, the national budget, a budget for every business and organization. Nobody wants to deal with budgets, yet everyone knows they have to, sooner or later. So why should the concept of budgeting money be so filled with fear and loathing?
It really shouldn’t.
Stripped of all its emotional baggage, a budget is simply a way of showing how much money is coming in – to a home, a business, or a government – and how those funds are being spent. A budget is merely a tool. But it’s an important tool because it’s essentially a road map for building a successful financial future. A budget is a plan for getting the most out of one’s money. And regardless of your age, your economic condition, or your occupation, creating and managing a budget will give you a sense of control over your money, and by extension, your life. If you haven’t created a budget yet, there’s no better time than now.
Setting Your Goals
The first step in creating a budget has nothing to do with numbers, per se. It has to do with your financial goals. Your immediate goals concern how you want to use your money today, and your long-range goals deal with how you want to spend your money in the future.
What are some of your immediate goals? Well, more than likely they would include paying the mortgage or rent, affording a car, taking care of your family’s needs – food, clothing, healthcare, etc. Some other goals might be going out to eat now and then, being able to afford your hobbies, taking vacations, paying off debts, etc. Your long-range goals might include saving for retirement, sending your kids to college, buying a second home, etc.
Income and Expenses
Once you have a clear picture of your financial goals, you can begin to devise a plan for reaching them. But you have to live within the reality of your economic life. And that means figuring out your income and your expenses before you win the lottery and join the ranks of the super rich. A good way to get a handle on these numbers is to think in terms of a month, since most bills in your life follow a monthly schedule.
You have several choices in terms of how you are going to record these numbers. The old fashioned way is to buy a ledger notebook and sharpen your pencils. But, nowadays, you can use an Excel spreadsheet or other software, such as Quicken or Microsoft Money. Regardless of the method, the procedure is the same.
In one column you list your expenses. Some of those expenses will be fixed. Your mortgage or rent doesn’t change and neither do some of your monthly bills, such as insurance payments, etc. Some expenses are variable, but still need to be paid: groceries, utilities, transportation costs, etc. Finally, there are discretionary expenses. These might include recreation, entertainment, etc. (Discretionary means that you would like to spend in these areas, but, if necessary, they can be curtailed, or even eliminated.) Where will you get these numbers? From the receipts that you have saved over the course of a month and the portion of all your bills that say: “Keep for your records.”
In the other column, you need to list all of your income. That would be your wages or salary (after taxes) and any other sources of income that are dependable and come in regularly. If you are retired, perhaps you have a pension or a social security check. Other sources may include alimony and/or child support.
Balancing the Numbers
This isn’t rocket science. The goal is simple: make sure your monthly expenses don’t exceed your monthly income. If they do, you need to examine your spending habits and see where you can cut back in the discretionary department. Do the same drill over the next few months so that you’ll be more aware of the areas that need adjusting.
With any luck, though, you might find that you’re spending less than you’re taking in. In that case, it’s time to think about your long-term financial goals and how you’re going to allocate any leftover money for savings or investment. And even if you don’t plan on saving for the long term, you should always set a little aside each month for emergencies.
Sticking to the Budget
Making a budget will be an empty exercise if you don’t commit to sticking to it. That doesn’t mean that your budget must be set in stone. As a responsible adult, you have the ability to re-evaluate and make adjustments as necessary. Life isn’t static…sometimes unexpected expenses crop up, as do unexpected windfalls.
A budget is all about balance. And as you find that your budget balances from month to month, your emotional life will also find more balance. It’s well known that finances are one of the main reasons that people experience stress and anxiety. Having a sense of control over your money helps transform stress into a feeling of empowerment and well-being.
What the “Experts” Say
You can check out any bookstore and you will discover shelf after shelf and row after row of books about personal finance. There are countless programs and instructions written by well-meaning “experts,” on how to budget your money. Some give mathematical formulas, such as the 50/20/30 guideline – 50 percent of your income should go to fixed costs, 20 percent to your financial goals, and 30 percent toward your variable expenses. Others will tell you how to boost your income by finding ways to earn extra money. There is simply no end to the advice that you can encounter. There’s nothing wrong with any of these expert methods, but they can be inflexible and not suited to everyone’s situation.
The bottom line is this: whatever method you choose, you are the one who is in control of your own budget. Stay on top of your budget, make the necessary adjustments and you’ll find that living within your means isn’t as difficult as you once thought.