Saturday, November 2, 2013

How to Make a Budget

What is the best way to start a budget? The first thing to do when starting to make a budget is to compare their income versus their expenses. The good thing is that it is quite easy to do.

It's too bad most of us never learned this in school and had to figure it out on our own - so here is the lesson that we should have been taught in 3rd grade:

If Expenses > Income = Bad, but if Expenses < Income = Good

And honestly, as simple as it sounds, that is the key to wealth. Anyone, and I mean anyone, who IS wealthy (I emphasize IS because I am not talking about people who appear to be wealthy, but who are actually in debt up to their eyeballs) spends LESS money than they earn.

The great news about this is that anyone can do this - no matter what their income level. If you can do it on a small income, then you can do it on a large income. If you can not do it on a small income, then you will not be able to do it on a large one either. Trust me!

If you really don't believe me, just ask all of the lottery winners who went bankrupt within years of winning millions of dollars.

Regardless of how your expenses and income compare right now - get excited, because you can easily change it!! If it is bad you can make it so much better!! If it is good, you can still make it even better!! I will show you how later, but for now...

How to make a budget

If you calculate your monthly expenses and income and your expenses are less than your income, then you are a rare breed who is in great shape, so just sit tight for a minute.

For everyone else, whose expenses exceeded your income - you are not alone. You actually have a lot of company. The problem is that it is not good company to be in! Most of the U.S has way too much household debt!

So, if your income is $900 and your expenses are $1000, that means you spend an extra $100 each month that YOU DO NOT HAVE!! What your job is now is to find out what you can get rid of or quit buying each month to save that $100. I know, I know - this is the part that hurts. Just like pruning a bush - cutting back hurts, but ultimately you are going to yield so MUCH more fruit because of it!

The goal here is to get your expenses and income to AT LEAST be equal. Once that is accomplished we can work on eliminating wasteful spending or cut other costs to bring the expenses below the income.

Now that you have calculated what your monthly income and expenses are we can start designing our budget. We will first discuss the less effective, but easier method for budgeting

The world's easiest budget

There are 2 simple rules to do a simple budget:

  1. You can not spend more money than you earn - carrying a balance on a credit card is not allowed.

  2. Money must go to the budgeted categories as soon you get your paycheck.

The way it works:
Rather than having 10-20 different categories of items to be budgeted for you only focus on the 1-3 most important ones and let the rest of the chips fall where they will.

So, to do this you take your paycheck of say $900 and right off the top you put the money to your main priorities. For many people this is tithing to their church, retirement savings, and college savings for children, etc...

A sample of this would be:

$900 (paycheck)

-$100 (tithe)

-$100 (retirement savings)

= $700 (for the rest of the bills and everything else)

It is extremely important that the money gets taken out FIRST for these few budgeted items. If not, I can guarantee that the full amount will not make it as intended.

I highly recommend making this process automatic by using direct deposit from your paycheck or some other form of automatic withdrawal. There is just something about human nature that has a hard time staying consistent with things like this.

Why do you think the U.S. government takes our taxes directly out of our paycheck, rather than coming to collect the full sum at the end of the year? It is the same principle - use it to your advantage.

Easy budget, but not very efficient

I think this budget is perfect for people who don't want to budget. It is simple, does not require too much time, and will help you reach some savings goals. That said, it is still inefficient and leaves the door wide open for inefficient and foolish spending. And we all know where foolish spending takes us - deeper into debt

I think it should be considered the "lazy man's" budget - and you are not LAZY, you are willing to work to get your finances in order!! I know this because you are still reading this article. So, since you are NOT lazy and are hungry for more of a challenge, let's look at how the pros budget.

The money saving budgeting method

Yes, this method takes a little bit more time and energy, but it also will provide you will long-term financial benefits if followed.

To do this we are just going to expand on the "lazy man's" budget mentioned above. Rather than having just 1-3 categories of items budgeted for, we are going to create as many as we need to put a limit on our spending in all areas.

You can use the mentioned budget spreadsheet as a guide for tracking your progress. Try to account for every possible expense that you could run into. You will never be able to budget for every possible scenario, but the goal is to minimize surprise expenses. Inevitably, there will still be surprises from time to time - so I suggest creating a category for these surprises (or you can just use your emergency fund).

How to stick with your budget and make it fun!

The almost sure-fire way to make a budget that fails is to NOT budget for any fun stuff. Budgeting should be fun and actually fun is a necessary ingredient for success. You need to budget for clothing, entertainment, going out to dinner, or whatever else it is you love to do! The key is to do it in moderation and to set limits and abide by them.

The amazing thing is that by budgeting for fun stuff, it actually liberates you to spend money on these items. When you have money budgeted each month to buy clothes, the money is now sitting there waiting to be used for that assigned purpose. Suddenly you can go clothes shopping without feeling guilty!

This is how budgeting truly becomes fun. It is a great feeling when you have money sitting in the bank waiting to be spent. Or, even better: if you start budgeting for vacation and after a little while you have hundreds of dollars just begging to be spent on a vacation!! You go on your trip and come back home and don't owe any money to any credit card companies. Now that is how a budget becomes fun!

1 comment:

  1. Most people have this impression that budgeting is such a boring and hard to follow thing. When in fact, they don't know how to make one. Thank you Bung Dirman, I found your blog post very interesting and easy to follow. I'll read your other articles too. Hope to find something more useful.

    Best Regards,
    Forex Fund Manager