Budgeting 101

Creating and sticking to a budget is not easy, especially for first time budgeters.

For anyone that has not lived on their own and has not previously had any payments to make, trying to create a budget that is suitable to your needs will take some time, as in getting on track with a budget.

The reason for a budget is to ensure that you don’t spend more money than you bring in as income in a month.

Financial professionals have given certain percentages to allot for certain expenditures, but in order for the budget to work for you and for you to really stick to it, you have to establish a few things.

Figure out why you need a budget, is it for saving money, paying off debt or purchasing a car or a house or starting a business?

All of the above are important life changing experiences. In other words all things that will make you look thoroughly at the way you are spending your income.

At this point you will want to look at what you spend your money on monthly that are not necessities of life, and only leave you short of cash at the end of the month. Enjoying yourself is important, but when you are spending money on frivolities you are taking away from reaching your goal. Consider alternatives of spending when

When figuring a budget the experts ask you to create a budget on your gross income. I, however, like to base it on the net income that is the actual money you take home from your pay, and minus the 10% that will be put away in a separate account to pay the bills from. My reason behind this is so that you can realistically allot what you have towards your expenses and also by putting the 10% in a separate account you will start to see that a little savings goes a long way and you will get to your goals sooner.

For example, say your actual take home pay after deductions is $400/ week; right then take $40 and put it in your other account. Now you only have $360/week and can only rely on that $360. Your monthly income would then be is $1440. By the end of the year the $40 that has weekly been put away in that other account will accumulated $2080 before interest). If your income fluctuates use the lowest amount you have taken home within any average month and again don’t forget to take that 10% and put it in another account.

You must be thinking, “This is nuts. How do I pay bills if I take 10% and put it away I need that money for thing?” Well not if you don’t count it in your budget, you will have to figure out how to make the budget balance with what you actually have.

Personally I was able to save 10% of my net income for about 5 years even when things were tough, suddenly I had a loss of income and things became even more difficult. I had to use my savings and it went a long way. It got me through paying bills and some medical expenses for almost a year. Yes, I had to start all over again but at least I had a cushion when I needed it most and didn’t have to burden family in assisting me. That ability to rely on myself financially in a time of crisis was a feeling of accomplishment

Now, before you start creating a budget you will want to pull out the last 3 months of your expenses that means everything, restaurants, coffee shops, bars, groceries, pet food & accessories, shoes, clothing, cosmetics, cell phone bills, utilities, gasoline, variety store purchases, alcohol, movies, gifts, insurances, medicine, toiletries, any payments towards credit cards/ loans, any money spent for the months.

Now start recording everything, either in a book or on an excel spread sheet, nothing fancy just record what you purchased and how much you spent on each item. Once your list is done categorize the items and get your total spent on each category for the past 3 months.

This will not only let you see where you can cut costs it will also let you see if you are spending more than you make per month.

If you find that you are spending more than your income you know you have a spending problem and you need to face a harsh reality, that if your attitude towards spending doesn’t change, then nothing will improve financially. It only gets worse.

The first thing you need to do at this point is to set a realistic goal as far as eliminating spending on frivolities. Don’t try to do it all at once because it won’t work as you have become accustomed to spending on certain things for so long that if you try to eliminate something completely it won’t work. If you are spending more than your income you definitely have to cut back on a lot of things to make your budget work. It may be time to consider a new cell phone plan or making sure you are doing everything possible to bring your utilities bills down like turning off all lights and keeping air conditioning down, fix leaky taps so you don’t waste hot water and your bills will be lower. Cut back from three coffees a day to one visit to a coffee shop; hold off on buying new shoes and clothes until your situation gets better but don’t forget to budget a small amount for those items. Finally, start surrounding yourself with people that are committed to saving and not with a group that actively overspends because you will be pulled in and it will defeat your efforts.

To make this work and start getting the feel of budgeting you have to start out small and you have to feel like you have achieved something. So set a small goal at first, say if in the first month you stay within your entertainment budget, go for a movie night and enjoy it, or if you are within your grocery budget buy a treat as long as you are within budget by the end of the month.

Don’t get discouraged if you find that you have to adjust your budget a few times to get it to balance and to achieve your goals. This is normal as everyone goes through adjustments because when you start, you will forget to include some expenses in your budget like yearly insurance, house taxes, unexpected medical bills.

Just don’t give up on budgeting; keep trying, it will mean financial freedom in the long run.