Let's Talk About The "B" Word

         The word “Budget” is not a bad word; instead, it should be used in everyone’s vocabulary. It’s interesting to consider though, that we as adults will exclude this word from our vocabulary the same way we teach our children to exclude the first word that popped into your head. Creating a budget is crucial to improving your finances. A budget will allow you to stop missing payments, damaging credit, and paying late or overdraft fees. Simply by creating a budget, you have now started to delegate where your money goes. Every dollar has a place, including savings, bills, and spending money. Having a budget can also help that person that claims not to have any money find some extra cash each month. Maintaining a budget is crucial to improving your finances. I process things well when someone breaks it down for me. So let’s take it one thing at a time.

1. Know Your Net (Income)

We need to know how much we are working with before assigning it a destination. Just like the other parts of this process we need to remember to be honest with ourselves. When we write down how much income we are taking in, this number must come from a paycheck stub or checking account statement that includes all sources of income. The important number to use is the net income, not gross. This is why a checking statement will work because it will provide us with the actual deposited amount that you get to spend. The gross income figure is our total pay before any and all deductions (taxes, 401k, and insurance). We are looking for a monthly amount here, so whether you are paid weekly, bi-weekly, or hourly try to figure a total amount for one month.

2. Cover the constants

Now that we know how much income we are working with, we can start looking at where it needs to go. We need to cover the constants, or the bills and expenses we know are the same or nearly the same each month. The constants include expenses such as a rent payment, car payment and insurance. These are easy to track and pay because they do not fluctuate month to month. There is a way to help make bills more constant that do have minor monthly variance in them (gas $45.23, $56.43, $41.54). When they are similar in amount as shown, we can simply create an average. This can be done for a few months, or over the year, if we were doing these 3 months just add them together and divide by 3. Write these all down below the total income from step one.

3. The unknown$

These are the expenses that no one talks about in terms of actual amount. The categories that include groceries, gas for our vehicles, and that little “fun” money. Can you tell me what you spend per month on groceries or your morning coffee?? This is where you will need to get that checking account statement again, and maybe those credit card statements we don’t look at. This will take some work because you need to summarize all those line items. Then create categories for the money spent on those things. Create expense categories like, “fun spending”, Vehicle gas”, “clothes”, and “date night”. We will again want to get averages of these amounts, so gather a few of each statement. Be consistent with the items and amounts that you add to each category. This should now allow you to generate a consistent monthly amount that you can deduct from that total income each month. Write these all down under the expenses from step two.

4. Excellent Budget

Now that you have all your known income and expenses listed we need to combine this information onto one sheet. I personally use Microsoft Excel to manage my budget, but it works the same to write it down as well. At the top you will write the total monthly net income, below that you will list the constant expenses, then the unknowns... that you now know. Once this is completed simply subtract all expenses from the income at the top of your form. This will generate only two outcomes. The final figure will be negative, or positive. In the event of a negative number, don’t panic, you will need to start cutting expenses or working another job etc. The thing to remember is that now you know, and can begin to improve your situation. If your number is positive, then you get to decide where you want that money to go. This can be a savings account, date night, or vacation fund. Now if you have debt, however; I would recommend putting it towards paying that off.

The budget is a dynamic document that changes, and grows, and needs to be revisited on a regular basis. So make sure you are intentional about reviewing this regularly and more often if this is a new concept to you. This tool just gave you control over your money, now it can only go where you decide it does. Once you start telling your money what to do, you can regain financial control and begin to enjoy using the “B” word!

Some of these expenses can be removed permanently as we pay off those debts (car loan, credit card, student loans) and we’re going to use a snowball to do it!