For those of us trying to get control of our finances, the dreaded “budget” word is something we must face. We’ve heard about them, talked about them, read about them, and perhaps even do them at work, but most of us have never tried to implement a budget in our personal lives.
For many of us, it may seem that we have more money going out than we have coming in, we have a bad feeling each week or each month we pay the bills, but we can’t put our finger on the problem. Although most of us know it is the right thing to do, we get a bit scared at thought of creating a budget – “what if it shows me something I don’t want to know? Then what do I do?”
Don’t panic! The first step is the most difficult step and it gets easier as time goes on. First, we must convince ourselves that a budget is really necessary. So let’s take a quick look at some compelling reasons why we need to put together a family budget.
1. Whether you are in an upper income bracket earning hundreds of thousands of dollars a year, or whether you are in a lower income bracket, we all need to know if we are spending more than we make. No matter what the income, if we spend more than we make, we will go into debt. A family making $200,000 a year is in debt if they spend $250,000 per year. We have all heard of some very famous celebrities who are in this situation.
2. Once you write down what you make and what you spend you can implement a plan to put yourself and your family in a better financial position for today and for your future, including retirement.
3. If you don’t start budgeting, you will get the same results that you have been getting up to this point. If you are not satisfied with those results, it is time to start budgeting.
4. Having a personal budget gives you piece of mind. You will have the feeling of being in control of your own destiny. You decide how to spend your money and have control over where you spend your money.
5. If all that is not enough consider this – it is just the smart thing to do. Companies that fail at budgeting, fail at business. People who fail at budgeting either fail in their personal finances – i.e., go into debt, or they never save the kind of money they are capable of saving for retirement.
Once you are convinced that budgeting is the right thing to do, there are some simple steps to take to make the task easy and successful.
1. Promise yourself and your spouse that a budget WILL be created and followed each month. Do it for your family, do it for your future.
2. Write down your total monthly income either on a sheet of paper or on a computer spreadsheet or budget program.
3. Determine what you are going to spend during the month, being careful to prioritize the most important items first, such as your monthly mortgage payment and food requirements. One way of doing this is to go back through your check register from the previous month. List the items that you want to include in this month’s budget.
4. If the amount you spend exceeds your income total, start cutting back – reduce or eliminate spending that cannot be supported by your income. For example, if you want to spend $200 a month on dining out but the mortgage and other payments have consumed everything but $50, the budget for dining out will have to be reduced to $50. Any over budget items that are left in your budget have to come from savings and that reduces your net worth. Conversely, if your income exceeds your budget needs, the balance can be applied toward paying off debt or add to your savings account!
5. I recommend creating several envelopes and using cash for most of your monthly budget, including what I call my weekly cash allowance. I find that by paying cash and not using a debit or credit card, I spend less. I am much slower to part with cash than am using a debit card; several studies have proven this to be trend. Soon you will be challenging yourself to see how under budget you can come, adding even more to savings or paying off debt.
6. Once you have the budget created and cash divided up, there is no more reason to go back to the bank during the month, unless you go back for a weekly allowance that has been budgeted. And there is no reason to use the credit card, adding to your debt.
Common sense tells us we should only spend what we make, but our culture and the banks that advertise on TV tell us that we can have whatever we want right now. Well this may true, but someday we all have to face the reality that all of those things must be paid for, and everything we delay paying for means we will have less savings for our retirement, and we end up paying the banks bags of interest, money that could have been applied to a long and happy retirement.
Let the budgeting begin! Happy New Year!