Budgeting 101

Are you wondering how to budget?  Or are you thinking, “I’m not poor, so I don’t need to do that“?  Or do you think it is too hard?  Here I will try to briefly explain the logic behind budgeting, the easiest way to do so, and why it is so important if you want to run a smooth-flowing household.

The Logic:

Money goes by several names, and one of those names is “currency”.  The reason for this name is good: money never stops moving.  Money comes into your bank account in the form of paychecks, and leaves to pay bills, buy food, and enjoy life.  If you never stop the money for a little while it will all move out and none will stick around.

Imagine that your money is a river of water.  In drought when the river is low you’re just outta luck if you want to have a drink or go swimming.  But imagine that one day you decide to build a dam on your river.  Now the water moves out slower and eventually a reservoir begins to fill up.  Droughts are not an issue – at least minor ones aren’t – because there is buffer between you and dehydration.

Budgeting is like building a dam on your currency.  Some, maybe even most, of the money keeps flowing through, but slower, more deliberately, and some inevitably stays behind.  Dave Ramsey says budgeting is us telling our money where it should go, instead of not knowing where it all went.

If ever you want to be financially stable (not in crisis mode if one of your vehicles breaks down, or your washing machine needs to be replaced) or if you want to retire at some level of comfort, you must be disciplined about managing a budget.

How To:

Thankfully, doing so is relatively easy.

You will first want to talk to your spouse if you have one and make sure they are on board/involved in this with you.  Then, write out your monthly expenses.  If you don’t know what those are, you will want to go through your bank statement and credit card statements and average out a few months of typical expenses. Average a few A-typical expenses too, just because that sort of thing comes up.  Then you will want to assess what is necessary expenses, and what is not.   For example, if you typically eat out 4 times per week, you may decide that that is unnecessary.  If you need to get new shoes for your kids each quarter on average, that is something that should be in the budget.  You may have enough clothes to get you through several months, so keeping up with the latest trends may not be on the list of ‘important’s.  If Christmas tends to sneak up on you, put that in the budget and set aside a pre-determined amount each month so that the annual holiday is not a tear-inducing bundle of stress come January.  If your car needs repair or tune-up a few times a year, put that in the budget.  If you have debt, put it on the list.  If you are behind on payments you may need to be really harsh at first (considering many things unnecessary) to get things under control.

Then you will want to write out your monthly expenses in order of most important to least important.  At the top should go your house payment/rent, food, utilities, transportation, and if you are a Christian, your tithe/giving should be at the top as well.  Underneath them you should write out the rest of your monthly expenses in that most-to-least-important order.  Any debt that you are behind on should go on the list, but be below the basic needs- make sure you eat before you pay a credit card.  Don’t let your electricity be turned off just so you can keep your smart phone.

Next, you will want to add up the amount you usually bring in each month- after taxes are taken out.  You only need the relevant info for a budget, and gross is simply unimportant when assessing how much you can spend.  If you are not salaried, and/or your income fluctuates a lot you will need to keep a running total on your budget so that you can effectively draw a line to say, “This is where the money stops, so this is where the budget stops.”  That is why the most-to-least important order is key.  You must ensure that the important things are paid first.  I made a sample budget below to show this method.  Note the far-right column is a running total, making it easy to know where to stop paying out if the money runs out.

If you make more than you typically spend each month, making a budget may be a rude awakening, but do not despair- paying off debt is much more possible if you have a plan of action.  Don’t let whim and ignorance rule your life or your finances.  Problems like this are best faced head-on.

Once you know what you make, what you spend, and what you should be spending, do some adding up.  Be sure to write in a bit for spending/blow, and a little for unexpected things that come up.

Keeping in mind that everyone’s financial needs are a little different, here is what a budget might look like:

Total monthly income after taxes are taken out:  $3500

Expense↓                                           Amount↓           Running Total↓

  • Tithe                                                $350                        $350
  • House Payment                            $1000                       $1350
  • Food                                                $400                         $1750
  • Utilities                                          $ 200                         $1950
  • Gas (for car)                                  $100                          $2050
  • Car Payment                                 $250                          $2300
  • Auto Insurance                             $  60                          $2360
  • Life Insurance                               $  40                          $2400
  • Cell Phones                                    $130                          $2530
  • Gifts                                                $  70                          $2600
  • Car Repair and Replacement      $120                         $2720
  • Health Insurance                          $250                         $2970
  • Date with Spouse                          $  40                         $3010
  • Blow/Spend                                   $  40                         $3050
  • Debt Payment or Savings           $450                         $3500
Total in equals total out- every dollar on paper and told where it will go.  Once you are done figuring out how much will be in each category, and you are in agreement with your spouse, sign the budget and commit to it for a month.  Be prepared for the first month or two or three to be unequal to your actual expenses.  It will probably take a while for you to iron out the wrinkles, but keep trying- it will get easier with practice.  Budgeting takes me about 10 minutes per month most months, now that I have a good idea of what we’ll be spending and making.

The end goal would be to become debt-free (most millionaires in the world don’t waste money on interest) and to have savings to fall back on.  The first thing you “save up for” even before paying off debt should be an emergency fund.  If you make more than $25,000 per year, you’ll want to save or sell until you have $1,000 set aside for dire emergencies.  If you make less than that, $500 should be your emergency fund.  This makes it possible for you to continue to pay your bills even if you need to fix your car or something.  Do not spend it on pizza or jewelry or vacation or a new couch.  Emergencies only.

If you need to pay debt off, I highly recommend buying a copy of Dave Ramsey’s book “The Total Money Makeover”  which will teach you all about both budgeting and paying off debt fast, effectively, and with momentum.  I gave Dave’s book to  my family members, and one sister is debt-free except her house, another has paid off tens of thousands in the past two years and put a down payment on a house, while another is in the process of becoming debt-free in the next couple of years.  Dave says on average, using the tried and true snowball method, people become debt free except their house in 18 months.  Generally the house is paid off in 7-9 years after that.

Why it’s Important:

Budgeting can help you weather the financial droughts that happen as a result of unexpected (or expected) times of added expense.  Tim and I have experienced very few “money fights”  since we started budgeting, because we have an emergency fund and we can always pay the bills.  I like bill-pay time because it is then that I know how much I get to save for the month.   Simple planning turns a potential negative into a huge positive.  Planning also makes my relationship with my husband better, and it enables me to give away to people and organizations that don’t have quite enough or are working to achieve an expensive goal that I believe in.   We have a fixer-upper house, and our budget enables us to continuously repair and renovate without going into debt to do so.

Most importantly, God entrusted me with a certain amount of His money, and I budget to use that money wisely.  If He has enough faith in me to give me income, I want to show Him that His trust has not been put in the wrong person.  I want Him to find me a faithful caretaker of what He’s given me.

 

 

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