You Need a Budget

In my first post I tried to give you hope. Now it is my hope that I can give you a practical first step in doing more than just surviving.

The title says it all: You Need a Budget. It really is that simple and yet not simple at all. Money is a tough subject. Maybe you feel like you’ll never have enough. Maybe you don’t like the idea of a budget because of what it means to you. Whatever your situation, learning how to manage your money well will change the rest of your life.

In the future I will expand more on the topic of budgeting. For today, I want to keep it simple and practical.

First go to your bank or credit card website and export the last 3 months of transactions. Next categorize each transaction and group by month. You can use Microsoft Excel, Google Docs or pen and paper. Pen and paper might feel like it will take longer but being away from technology can help from getting distracted.

Now that every transaction is categorized, review your totals for each category. Your first thought will be “how did I spend that much on X?” For me it was work lunches. I used to go out for lunch every day. That 5-8 dollars adds up fast. For others it is their daily coffee.

Next question is how much did you spend in each month compared to how much you made? If you are spending less than you make, great! Budgeting can help you prioritize long term goals like retirement. If you are spending more than you make, now is the time to break that habit. Budgeting can help you realize where you need to cut back. It also helps by forcing you to decide where you are spending your money before the month begins.

The final step is to create a budget. Based on the categories you spent in the previous months, specify a dollar amount you plan to spend in each category next month. Start with things that are constant, like rent or an auto payment. Continue with more variable things like utilities. Keep going until your income minus planned expenses equals zero. This is called a zero-based budget. It doesn’t mean you should have zero dollars at the end of the month. It means each dollar in your bank account is categorized.

What happens when you run out of money before getting through all your expenses? Look at your remaining expenses and decide which are needs and which are wants. Sometimes this can be hard to judge. For example, you need clothes but you may not need more. Another type of example is quality of life things. You need food to live but you don’t need sirloin steak every night.

Now is the hardest part, you have to actually live on the budget. Imagine you are planning to build a house. You wouldn’t start by saying, just put it over there. No, you would go through a long process that produces a blueprint which is the sum of every decision you made. If your builder ignores the blueprint you would be furious! A budget is like a blueprint. If you made it this far, you have a plan. Don’t ignore the plan. Just like building a house you may have to change things as the month goes along. That is fine. Just remember that income minus expenses still has to equal zero. So if your phone bill is higher than normal, that money has to come out of another category.

There are many more things I would like to say related to the subject of money and budgeting. However, today I wanted to get as real as possible in one post. I know too many people living paycheck to paycheck. Using the above method you can start living inside your means and stop living paycheck to paycheck.