Chapter 4: Build a Budget

Do not be intimidated or put off by the word “budget.” It is nothing more than a plan for what you want to do with your money. A well-designed budget is not restrictive, allows you to make the most of every penny you earn and will keep you on track with goal achievement. Though everybody’s budget is different, there is one consistent rule: expenses should never exceed income.

List and total your monthly net income
Begin with income, as it will determine what you can afford to spend and save each month. Total up every net (already taxed) dollar you make in a month. Avoid overestimating your income. It’s better to have money left over than be caught not being able to pay your bills.

List and total your current monthly expenses
You will see that there are two columns in the budget worksheet – current and proposed. In the current column, list your monthly expenses as they are now. Use the figures from your tracking forms to help you with accuracy. Do not forget those expenses that come up once in a while (called periodic expenses), such as gifts, weekend trips, or vehicle maintenance costs. Using conservative estimates, total what you think you spend on them in a year, then divide the number by 12.

Example: You purchase birthday gifts for seven people each year. Each gift is approximately $15. In one year you spend $105 (7x15 = 105), which averages $8.75 per month (105/12 = 8.75).

Subtract your current expenses from your current income
Total your current expenses and subtract the sum from your current income. If, on paper, you have money left over but in reality you are living close to the edge or falling behind, then you have not accounted for everything or some of your figures are wrong. Examine your budget for inaccuracies and make corrections.

Identify where you want to make budgetary changes
Once you have an accurate idea of where all of your money is going today, it is time to make changes for the future – particularly if there is more going out then is coming in. Your options include increasing your income, decreasing your expenses, or a combination of the two.

Using the current side as a guide, consider each expense carefully (remember those wants and needs?). In the proposed column, actively decide where you want your dollars to go.

Example: Lunches out are costing you $200 per month – a figure you are not happy with. Since it is realistic for you to bring food from home at least half the time, you can reduce the expense to $100 and adjust the figure in the proposed column.

Include savings goals
Again in the proposed column, enter the amount you have earmarked for the things you want to save for, using the figures you developed from the Financial Goals Chart. They are now an expense and you will “pay yourself” as you would any other important bill.

Don’t forget debt
If you have credit card balances or unsecured consumer loans, include those payments into your budget as well. Figure out the amount you can realistically pay each month, and commit to never going under that amount. Since interest rates for this type of debt are often very high, it makes sense to pay it off as quickly as possible.

Beat the budget busters
Sticking to your budget can sometimes be a challenge. Use these tools and techniques to help you stay the course:

• Avoid those stores, malls, and online retailers where you know you have a hard time controlling spending.
  
  
• Write a list of what you need before shopping, and buy only what’s on it.
  
  
• Reward your efforts with an occasional, yet affordable, reward.
  
  
• If you’re on the verge of splurging, seek the support of a friend who knows what you are trying to accomplish.
  
  
• Charge purchases only when you can afford to repay the balance in full by the due date.
  
  
• Use debit cards. They provide much of the consumer protection and convenience of a credit card without a bill at the end of the month, and because of the detailed statements you receive, you can track spending easier than with cash.
  
  
• Question each potential purchase to know if it is a want (nonessential) or a need (essential). Recognizing the difference between the two can help you avoid unnecessary spending and impulse shopping.
  
  
• Revisit your goals. By sacrificing those things you don’t really need today, you can attain your more meaningful financial objectives in the future.