People have many different opinions of what a budget is. Some people think it’s just a vague idea of how much money you make and what your bills are. Others think it’s a strict set of rules that make your life inflexible and miserable. Both of these are wrong. A budget is just an on-paper snapshot of your average monthly income and expenses. A plan for what’s coming in and what’s going out. It can be flexible to fit your priorities and your needs. It can be a huge relief to have it all down in black and white.
With a budget you can see how much you really have for fun money and shopping sprees. It can help to stop impulse buys and it can really help you see where you need to cut back and where you are doing a good job. Most importantly, it grounds you in reality.
Estimating Your Monthly Income
The first step of a budget is to estimate your monthly income -that is, money coming in. Here we try to estimate on the conservative (low) side. Suppose you get paid every two weeks. We’ll assume that you get paid twice per month (let’s assume the extra 2 pay cheques per month are bonus). So take your after-taxes amount on your pay stub and multiply by two. Or if you get paid every week, multiply by 4. This is your income from that job per month. Do this for all your jobs. Then add in your average income from other sources like child support, government assistance, and other income. This is money that you are earning. Estimate this as conservatively as possible and only include money you are 100% sure you will get. This is your average monthly income. If you need to increase this amount it’s time to get creative about part-time jobs, overtime, or a career change. At the top of your budget, write down all your sources of income and their amounts, and on it’s own line write down the total: your Average Monthly Income. Circle it. It’s your absolute spending limit.
Those Pesky Fixed Expenses
The next section is to estimate your fixed expenses. These are your bills that you have to pay… or else! These include things like: mortgage payment, utilities, phone, cable, internet, groceries, minimum debt payments, child support payments, taxes owing, child care, insurance payments etc. Check you last few months of bills, receipts and statements to get an accurate estimate. Here we want to estimate high. So round up. For bills that fluctuate like utilities, pick your highest amount and use that. It’s best to give yourself some wiggle room. Total this up and this number is your Fixed Monthly Expenses.
If you want to reduce this number it’s time to look at where you can cut back or shop around. Maybe you can stop running the water while you do the dishes or brush your teeth. Maybe you can switch from premium to basic cable, go for a cheaper cell phone plan or turn down the heat at night. Maybe you can get rid of some bills altogether. Or perhaps shopping around to a cheaper service provider is the way to go. Cut your grocery bill by buying generic or store brands. Write down all these expenses on your paper budget and put the total in bold for your Fixed Monthly Expenses.
The Sneaky Flexible Expenses
The next section is your other expenses that aren’t mandatory, but they somehow sneak into your life. These include eating out at restaurants or fast food places, your morning coffee, movies, ball games, clothes, gadgets and toys. Maybe you like to buy a new book every week. Or a new purse each month. Perhaps poker night each week, or a weekend case of beer with the boys is one of the expenses you keep forgetting about. Check back through your bank statements and receipts to see what you’re missing. Estimate your averages to the high end. Write all these down in a new section on your budget and total them up. These are your Flexible Expenses.
This is where you can cut out the most fat. If you are currently in debt, then you really need to do some serious cutting. You need to go bare-bones until you get debt free. After that you need to cut your expenses so that you have room for saving for retirement and for other long and short term savings goals- like a car, house or vacation.
Total up your Fixed and Flexible Expenses. Put this on a new line on your budget: Total Monthly Expenses. Next, subtract your Total Monthly Expenses from your Average Monthly Income. Bingo- that’s your Net Monthly Income. If the number is negative you have a big problem – you are living on more than you make, and using debt to pay for your life. You need to increase your income and reduce your expenses until you get some breathing room. If the number is positive, then you’re off to a good start. This extra money should go toward an emergency fund, paying down debt and saving for retirement and future purchases.
– Do your budget on the computer or on paper with a pencil. You’ll be doing lots of changes.
– Your spouse must be involved in this process. You two are a team, and attack your budget as one.
– Be honest with yourself- you’re not fooling me, since I won’t be seeing it.
– Allow for flexibility in your budget. If you can afford it, allocate $100 or so per month to be Unexpected Expenses Money.
– Revisit your budget each month. Review whether you stayed on budget or whether you need to re-think some numbers. Make it more and more accurate the longer you use it.
– To keep your spending on budget, take out cash and put it into envelopes for each of your needs. Draw money from each envelope as you need it. When the envelope is empty, you’re out of luck till next month.
– There are lots of types of budgeting software and work-sheets that you can buy or find online for free. These might be a big help. Personally I prefer my pencil, calculator and lined paper.
A good budget is one of the foundations of getting your financial life organized and under control. It is a starting point you can use to work from and expand outwards. It can also be encouraging to work toward lowing those expenses and increasing that income. Get started and feel the difference it makes to be managing your money with purpose and power!