Creating and implementing a budget is the first step toward getting control of your finances. My monthly budget is the most important, and most often referred-to part of my HMG “Finances” section.
Budgeting simply means to live within your financial means, which is the opposite of our country’s prevailing “buy now, pay later” lifestyle. If your spending is already out of control, implementing a budget will be difficult – but it is absolutely necessary. A budget forces you to get control of your money so that you can take steps toward reducing and eliminating your debt. If you want to achieve debt freedom, you must have a plan of action.
The correct way to make a budget is often debated. You can purchase workbooks and software programs to help you, but all you really need is a notebook, a pencil, and a calculator. You will need to write down every penny you spend each month, so you know exactly where your money is going. To get an accurate picture, you’ll need to keep all receipts, including those for small cash purchases, and track your expenditures for at least a full month.
When I was in college, I kept my budget on paper, using a free budgeting workbook that I got from my bank. However, because my husband and I operate a business, I now use Quickbooks to track our income and expenses. Our income is unpredictable because my husband is a self-employed, independent contractor who works on commission. In January of each year, I enter all of our income and expenses for the previous year into Quickbooks. When I’m finished, I have a profit/loss report showing how much we spent in each expense category. Based on this information, I record the following on a ledger sheet:
1) Average monthly income
2) Monthly savings goals (retirement, property taxes, girls’ college education, vacation, new vehicles)
3) All fixed expenses. These are things that have a fixed monthly payment, like telephone, water, trash pickup, insurance, etc.
4) Variable expenses. These are expenses that vary from month to month, like food, electric, entertainment, hobbies, clothing, etc. For these expenses, I determine the monthly average and use this figure as a starting point.
If the average monthly income exceeds the average monthly expenses, including our savings goals, then great! If the expenses exceed the income, then I start tinkering. The easiest expenses to control are things like entertainment, dining out, books & CDs, etc. It’s amazing how much money we all waste on unnecessary things. I adjust those amounts first. If those adjustments aren’t enough (though they usually are), I work on other controllable expense categories, such as food, clothing, and utilities. I make small adjustments in these categories, and keep adjusting until everything balances out. The one thing I never compromise on is our savings goals. This is very important! Pay yourself first, and cut down on what you pay other people!
I must stress that you need to keep good records in order to make this system work for you. For example, we pay for almost everything with our Discover card because we earn cash back. We pay this bill in full every month, and I break down all transactions by category, so that I can enter them into Quickbooks. I also keep all cash receipts in a small accordian file, broken down by month. I total them up each month and figure those expenses into my budget as well. Programs like Quickbooks and Quicken make tracking your expenses very simple. These programs are expensive, but you can often find older versions on eBay for $10 or less. I use an 8-year-old version of Quickbooks that I bought at a garage sale for $2. It’s perfectly adequate for my needs.
This system has always worked for us. Throughout the year we have months that are a little tight, and it’s tough to stick to the budget. However, we also have months when a surplus starts to build up in our checking account, and we’re able to put extra money into savings or investments. Overall, it balances out in the end.
We do occasionally exceed our budget. This year, we went over budget by about $6000, partly because we had to purchase a new mattress and box spring ($1200), and we also took an unplanned vacation ($1000). The rest of our overage was due to unexpected cost increases, and lack of care in spending. We still met all of our savings goals for the year, but we did make some mistakes. We’ve learned from them, and we’re beginning 2009 with a new determination to make smart choices.
Living on a budget will probably be difficult at first, because it will require a change in the way you think about money. The longer you do it, the easier it will be. Soon, living on a budget will become the new norm for you, and when you get your spending under control, you can start working toward achieving your long-term financial goals.
If you’re hesitant to do the work necessary in making a budget, remember what I always say–knowledge is power. If you want to keep more money for yourself, you have to know where it’s going.[print-me/]