Whenever you are trying to fix or change what’s happening with our money, the most important thing you can do is to create a budget. It tells you exactly what you need and can do with your money month to month. It’s honest. I call it the boss to spending; and to me, it’s my best financial friend.
The budget tells you where you are starting from. It answers important questions that enable you to make decisions about your day to day handling of money. Questions like, “Am I living within my means?”, or “Are my expenses higher than my income?” or “Do I have subscriptions/recurring expenses I’m not using?” or “Do I have room for savings or a special purchase?”
When you create your budget, you suddenly have information. You have knowledge. And as the saying goes, “Knowledge is power.” You now have the power to make decisions with your money that will resolve issues, improve your financial condition, and allow your financial dreams to start becoming goals. Here’s the key: doing a budget is not difficult, should not be intimidating, and requires no special technology.
A pen and paper is all you need to write out your budget. It’s the simplest, most un-intimidating way to do a budget in my opinion. But there are seemingly infinite (free) resources available on our computers (spreadsheets and templates) or online (budgeting tools) to help. If you have access to and are comfortable with technology, it can be an efficient approach, depending on the technology you choose.
I find the most efficient technology approach to be a spreadsheet due to use of mathematical formulas for totaling, and the ease of modifying, adding or deleting line items. Online tools and templates can be helpful; however, I find most to be too detailed, causing the process to take too long and the resulting budget to be filled with far more line items than necessary. I know from my own experience and that of my clients, that the simpler the budget, the easier it is to follow. For example, you only need one line item for food/grocery, and it should include non-food grocery items like paper products, toiletries and cleaning supplies. And it should include eating out/ordering in. One line item for food/grocery is easy to track and gives you spending flexibility within that category.
Whatever method you choose to create your budget, the important thing is to start. I can assure you, you will feel a sense of increased control over your money with every line item you document.
As you put your budget together, remember that every budget has these three sections: Money In (Income), Money Out (expenses and savings), Balance (profit or loss). You are living within your means if your Money In is greater than your Money Out, meaning your budget is balanced with a Profit. You are overspending if your Money In is less than your Money Out, meaning you have a Loss. Your job every month is to plan your budget so that you are living within your means. The resulting Profit is what you put towards your financial goals. It’s that basic.
The bigger your monthly profit, the faster you achieve whatever financial goal you are working on. The more you spend, the less profit you will have, and the longer it will take to reach your financial goal.
But what if your budget shows a Loss? What if Money In is less than Money Out? You are living BEYOND your means, and your budget is not balanced. You are falling backwards financially.
There are two options to turn the Loss into a Profit: reduce expenses or increase income. Start with reducing expenses. How? First, if you have debt, bring all of your debt payments down to minimum payments only. Don’t pay extra on debt just yet. Next, in my experience, we as a society tend to spend more money than necessary on food, shopping and subscriptions. Reduce your spending here. Go as low as you think you can. Then, look at luxuries like lawn service, cleaning service, etc.
If you are still showing a Loss, look to increase your income by reducing the number of deductions coming from your paycheck or getting a second job (my least favorite way of making your budget balance). But focus on expense reduction first; it is usually the answer you need. In extreme cases, you might need to cancel things like the cable bill, or delay paying unsecured credit cards.
Once Money In is equal to or greater than Money Out, you have a balanced budget. Congratulations! Hopefully, you have a little profit (my first budget had a profit of just $5). Take a look at your work. Doesn’t it feel good to know your bills can get paid, and that you know exactly what your spending can be in order to live within your means? I found this knowledge really empowering when I did my first budget. And I still feel it today. I hope you do, too.
In a future post, I will talk about how to build key components into your budget that move you to what I call financial stability. But for now, you are in control under the guide of your budget. Trust it. Let it be the boss to your spending. In return, it will also be your financial best friend.