We’ve talked at great length about saving money (on groceries and monthly bills, for example), and there are many reasons to save that money. Maybe your kids are about to go off to college… or maybe you need a new piece of equipment… or maybe you need to save that money to pay off your debts and “get out of the hole”. Whatever your reason for wanting to save, there’s something else you should take into consideration – budgeting. Even if you have plenty of money, you still need a budget. Without one, you’ll surely go broke.
How do you make a budget?
A budget is a means of tracking your income versus your expenses over a specific period of time. They’re usually done on a month-by-month basis for personal budgets, or quarterly for businesses. They’re typically done on a spreadsheet or in a ledger book. Making a budget can be very stressful, but it is definitely worth the time spent doing it. Rebecca from Letters from Sunnybrook says “The first thing to do is create what I like to call a ‘Financial Snapshot’.”
Know how much you make.
While this may seem pretty obvious, some people don’t take this into consideration. “How much you make” shouldn’t be a high-end figure, or even a middle-of-the-road guesstimate. It should be the rock bottom amount you know for a fact you’ll bring home. If you get monthly bonuses, do not figure them in. Nor should you figure any compensations (the money someone pays you back from when you pay for something (like gas mileage at work, for example)) or estimated overtime. Figure your baseline salary.
Know your monthly payments.
This part could get a little tricky. Things like your mortgage or rent, car payment and insurance may remain constant from month to month. These are called “fixed expenses”. Your water, power, gas, and even your phone bill could change depending on your monthly usage. These are called “variable expenses”. Look through your past 12 months for each of the varying bills, tally each individually, divide by 12, and that’s an average estimated monthly cost. Of course, in the winter you’ll use more gas running the heat, and in the summer the same can be said for the electricity due to the air conditioner. Again, these figures are simply averages.
Budgeting your month.
Now that you know what you make and what you owe each month, it’s time to do the math. There are actually a few different ways you can do this, but for now we’ll cover the easiest way to calculate your budget. It’s as simple as listing your income, and subtracting your expenses. As long as the number you end up with is a positive number, you’re “in the black”. That just means you can afford everything you have to pay each month without owing a remainder to any of your bills. If your expenses are more than your income, you’re “in the red” and need to go a little deeper with your budget.
Why should you have a budget?
Have you ever wanted something you knew you couldn’t afford? Let’s say you decided to buy a boat. Maybe you went ahead and got that boat, and juggled payments on everything for a while. That may (or may not) have worked, but chances are you caused a lot of undue stress in your life. If you had only budgeted, you would have known if you could afford it, and if you couldn’t, you could have planned for it. When I was a kid, my mother used to have a “Christmas Club” account at the bank. She’d put a few bucks in the account each month (which always drew interest), and at Christmas time, she’d have enough money to buy everyone on her list a gift! The same thing applies to your “boat” – plan for it, save for it. If you know you cannot afford extra payments every month on a boat, save your money until you can buy it outright… or pay off another debt and get the boat when you have the extra money each month.
The point I’m trying to make here is that if you go throwing money around all willie-nillie, chances are you’ll not only stress yourself (and your family) out unnecessarily, but you could potentially lose services temporarily and/or destroy your credit. As for your credit, that will cause you to not be able to make a big purchase (like a new car) when you really need it the most – or maybe you can, but your payments will be much, much more because of the interest rate.
Listen to Jendi’s interview at MomPrepares.com with Kelly from The Centsible Life as they discuss Tips for Being Financially Prepared.
When should you make a budget?
Make your budget when it’s best for you. Personally, we do our budget planning in December for the coming year. We figure out how much extra money we have in the bank for Christmas, pool all of our resources, then redistribute as necessary (savings, checking, kids’ funds, etc). Then we print our forms out and plug in the numbers in pencil. Maybe you’ll choose to keep yours digital, which is fine. I would recommend though that you print them out, too. You can fill everything out on your computer and save them, but should you lose power or worse, your computer crashes, you’ve lost that information at least temporarily, if not for good! Always, always keep a backup and a hard copy of your important digital files like your budget.
Who should keep track of the budget?
Tracking your budget can be done by either partner or both. Some people choose to share the responsibility. One person does the budget one month, the other does it the next… or both people sit down and do it together every time. That’s a responsible way of sharing tasks, but it can get a little cluttered. It may work better for you to just have one person doing the budget and discussing the results with the other each month. Alexandria at UntrainedHousewife.com says “having more than one person controlling the family finances gets messy.”
Where should you keep the budget?
Your home office is the ideal place to keep your budget. It’s in a centralized location, everyone knows right where it is, and you’ll never lose track of it. “Home office” doesn’t have to be a whole room devoted to “office space” – it can be a desk in the living room, or even a table in the corner of the kitchen. Whatever works best for your family in your living space is the way to go.