“SHH! Don’t let them know we are on a budget!” Says my then 4 yo. “Why not?” I say. “Because I don’t want them to know we are on a budget. You can tell our family, like Papa and Nina but don’t tell my friends”.
HER EXACT WORDS!!
What shame! How did she arrive at the conclusion that being on a budget was something to hide, or be ashamed of? Somehow my teachable moments on money management was interpreted as something negative.
Yes, I tell my children that we are not able to buy things they ask for because we are on a budget! However, I buttress that statement with, don’t you want to get X? “X” being the family trip we’ve been talking about or a big-ticket item that we have been saving for.
The idea is that you can’t just buy the pretty toy in Target because it’s calling your name. We spend our money on the things we need and we save for those important things we really really want.
For a long time, I was misguided in thinking that I had a budget. I wrote my bills down every month in a little notebook and I had my online banking set up to make timely payments. But I was missing the planning component of budgeting; planning for my present circumstances and future objectives.
WHAT BUDGETING IS NOT:
Budgeting is not balancing your checkbook every month.
It is not monitoring the debits to your online banking account.
It is not paying your bills and then spending whatever money is left over at the end of the month.
WHAT IT IS:
Budgeting is the process of allocating your take home pay to the expenses, savings, and investment accounts you wish them to go. It is the act of “telling” your money where to go and how to work for you! Every dollar of your take home pay should have an assignment. The assignments are doled out at the beginning of every month.
Budgeting allows you to know where your money goes, avoid or get out of debt and plan for your future!
Here are the 6 easy steps I follow monthly to create a budget:
- Write down all of your expenses and the due date for each (once this is done, you don’t have to revisit this step).
- On an excel spreadsheet, write down total income and the frequency that you receive a paycheck (ie. Weekly, biweekly, monthly). For example, if your take home pay is $2,000 on the 15th and 30th of every month, write that amount down in the income section for each interval (15th and 30th).
- Assign each expense to a paycheck. For example, if you get paid on the 15th and 30th, but your cell phone bill is due on the 21st, you should assign that bill to the 15th paycheck, so as to avoid late fees if you were to assign it to the 30th
- List all of your expenses on the spreadsheet. Add all expenses and subtract the total from your take home pay for that assigned paycheck. Any money left over is considered excess income.
- Create a line item for your savings goals or expense goals, and allocate any excess income to your identified goals. (Side note: A savings goal is something you need to save money for to obtain. Whereas an expense goal is something you intend to purchase with a portion of the excess income you currently have (no savings required)). The objective is to assign every dollar to a bill, savings goal or expense goal. For example, if you wish to purchase a house, or you want to travel to Cancun, or you’d like to retire early; these goals should be specific line items in your budget. Allocate your excess income to each line item so that you may attain your goal!
- Repeat these steps every pay cycle.
Problems with your budget:
You may discover that you have a deficit or insufficient funds at the beginning or the end of the month because many of your bills come due around the same time and you don’t have sufficient funds to cover all of those expenses. For many, the beginning of the month is the tightest because one’s mortgage or rent is typically due.
If you do not have the funds at your next pay cycle to cover the deficit, you may be living beyond your means!
You must either bring your expenses in line with the income you currently earn or you must find another source of income to compensate for the shortfall.
Now, if you do have the funds to pay those expenses at your next pay cycle, you could do either or both of the following:
- Contact each biller and ask if they are willing to change your due date. This will help you to pay that bill at your next pay cycle? A few billers may accommodate your request in the hopes that you will pay your bill on time.
- If you are disciplined, you may also pay the bills with a credit card and pay off that card during your next pay cycle.
PLEASE NOTE: I make this recommendation with extreme trepidation…as this approach may only get you deeper in debt and I sincerely don’t want that for you!
However, if you are able to pay the credit card off every month, there can be significant benefits to taking this approach:
- Positive impact to your credit score and increase your creditworthiness
- Ensures that your expenses are paid on time, which also helps your credit worthiness
- You may earn rewards if you use a rewards credit card
If you choose to use a credit card to timely pay your bills, I recommend adding the balance due on the credit card as an expense line item to be paid during your next pay cycle. This way it is on your radar and will not be overlooked.
Budgeting allows you to know how much money you have coming in so that you can determine how to make that money work for you!
Whether you want to adopt a child, take a trip to Disney World or buy a new car….you need to know how much money you have to achieve your financial goals.
Remember…a goal without a plan is just a wish!!
I wish you all the best in budgeting to achieve your financial goals!
Good luck, and let me know how it goes!