Budget
Is a budget EVIL? Is a budget BORING? Is a budget CONTROLLING? While it seems that all of these concepts are true, they are not completely true. It is totally your perspective that will determine how you decide to use a budget. Your perspective abouta budget will change if and when you see results from your budget.
A budget is a tool and that is all, like a hammer, you can drive in nails or hit your thumb. Let's see if we can make a budget useful instead of dreary. Sorry to say this but in order for a budget to be useful you need to make some decisions. The best thing you can do is to write down your answers and save it. If you are on a computer, create an email to yourself and just don't erase it or save it as a draft and just leave it there. You want to come back later and review your thoughts and see if you have made any progress. The primary question that you must answer is simple: what do you want a budget to do? Stop for a minute and write something down and save it.
Hopefully you have written something that is truthful and realistic, otherwise you wasted your time. There are a couple of rules in terms of a budget: 1) keep your budget private, you don't need to explain anything to anyone else because these are your choices and others may not agree, 2) be truthful with yourself because it doesn't do any good to lie if no one else is going to be reviewing your comments, 3) be serious, personal finances are not a joke, they can be funny but the long term goal should be very serious.
In order for a budget to be useful it must be based on reality. Budgets allow you to work toward a goal and the goal can be wishful but the projected results of a budget will determine how fantasy or probable your goal is. If you want a budget to help your personal finances, then that is a good goal as long as your understand that your life will require changes. Living within a budget with a goal of improving your financial position required dedication and sacrifice, giving up some of the things you enjoy now, but there are options.
The reality of a budget starts with collecting information about income and expenses. The easiest to start with is the income section because for most people with a job, the amount of income can be reasonably predicted. The good thing about a budget is that you can identify the gaps in income in advance and find ways to fill the gaps, if desired. In order to be of the most value, the smaller time frames provide the most information so a weekly time frame is suggested. If you are paid weekly, then this works, if paid every other week or twice a month then the payment dates can we figured out on a weekly worksheet.
If you have Microsoft Office then you have access to Excel and this is a good tool, but there are other tools that work like it. Microsoft Office allows you to set up files and store them on your computer so they are not floating around in the 'cloud'. If you set up a Google account then you can use the Google version of Excel. Personal preference is that Google is a trust issue because you do not control the files you create, they are stored on Google and can be accessed from any computer but that is not really that important. Google will have access to the information in the file so be careful.
Now consider the flip side of income in a budget - the expenses. Don't be shy and don't skimp, everything is included because if you spend something it should be in the budget. The level of detail in a budget is totally up to you and you can go to extremes, remember, this is intended to give you direction not a step by step path because every step provides opportunities and hazards so flexibility is useful.
Expenses are broken into two big groups: fixed recurring and variable - suprising but every thing fits in one or the other. It is easiest to understand the fixed recurring expenses and it will surprise most people just how many there are. This group would include rent because that normally happens monthly and is for a fixed dollar amount but the rent leads into the utilities which can vary but still have to be paid every month so this is kinda variable but predictable recurring. Now think about the other recurring items that are reasonably fixed or predictable. Do you have a car payment? There is your cell phone, do you have cable or internet or satelite? Now go into other areas that may not be monthly like insurance: auto, life, health, renters. Some of these are monthly and some are twice a year or once a year. If it is going to recur, make a note of it.
Variable expenses have a greater variety simply because they are variable and many do not recur on a regular basis. Frankly, it is silly to budget a fixed dollar amount for clothing each month and then plan on spending it, that is wasteful. The budget gives you direction and limits not expections of expenditures. One thing that should become a montra is the simple question: Is this a need or a desire? Followed up by the crass question: Is there a cheaper option? There was a woman and her dream was a specific type of handbag just because it was a dream but she also had dreams of paying off all of her debt and saving for retirement. Dreams are nice to have but they should really be based in what will add to your life not simply a deduction from your checkbook.
In order for a budget to be useful, all of the work to create a budget must actually provide direction, information and assistance. Here's how you can accomplish this. The direction comes from knowing where you want to go and encouraging you to take baby steps. The information is the result of seeing how your decisions make the structure, and assistance comes from the thinking in advance of the decisions that must be made.
PLAN FOR SPENDING MONEY
Here's the thing, a budget is used by small business, big business, and government. There are as many different versions of a budget as there are people that prepare the budget. Everyone that prepares a budget will do it for different reasons. For most business people, the budget is a projection of overall business activity and an estimate of the revenue, expenses and profit and the level of detail can range from hundreds of pages to the back of an envelope. But this is the point, as a person, budgeting is different, less complicated and more personal. Budgets are intended to provide you with an understanding of what happens with your finances but it helps to define the limits and conditions. People must live in a real world of income and expenses. In business and government, you have an option to increase sales and control costs but as an individual, you have limits in your ability to dramatically increase your income or reduce your costs. So, the budget needs to help you to understand these limits and work within them.
Lots of books will tell you to prepare a budget on a spreadsheet because it becomes easy to update and roll forward, the problem is that a bunch of stuff on a spreadsheet is difficult to visualize, and that is what is important to make clear decisions. While this sounds 'Old School', let's convert the process to paper and pencil to do the first round. Here's the process in a nutshell.
Step 1: got down to the office supply store and get a desk calendar for the whole year with a page dedicated to each page.
Step 2: write down all of the income, when the money is actually available.
Step 3: write everything down on the calendar based on the day of the month when it becomes due.
That's the basics, the rest is just math.
The point of a budget is to provide an understanding of the cash flow for an individual, tracking the income and the expenses. You have a full year in those calendars so fill in all of the income and all of the known expenses like rent and car payments and cell phone payments and insurance payments and utility payments, and those expenses just keep coming. These are the expenses you can plan on being there constantly and you haven't gotten into the variable expenses like food and clothing, but those keep coming also.
Now that you know what the income is going to be and you know what the expenses are going to be, we can figure out if you are up or down. This is where you get direction for the next steps.
MAKING CHANGES
In order to make changes, you need to understand what needs to be changed. This is where the math comes in. Start with the first week, add all of the incomes together and subtract all of the expenses and then write down the total. Hopefully, the total is positive, meaning money is left over. Now do the same thing for each week and ending up with a total for each week, to stand on its own. If a week comes up negative, then you have a problem, if you break even then you have a starting point and, if you have a positive balance then that is good. But it is only the beginning.
The reason for laying out the income and expenses on the calendar is a visual impact. When you see a list of expenses, you seldom correlate the list to time frames and matching it to income. If you want to add more information, put a subtotal at the end of each day so you can see where you are along the way. The budget is a planning tool not a task master. A budget allows you to see what is coming and what will be offset by future income, on a day by day basis. If you have ever heard the saying: "Living Paycheck to Paycheck" then this gives you an idea of what you are trying to avoid. The goal is to not live on a rigid desperation of waiting to run to the bank and cash your check, the goal is to plan your cash flow so that you have the money when the need arises. Take another look at the budget as it is laid out on the calendar, you can see when the income is coming in and the expenses are going out. This is the essence of a budget.
There are a couple of truths that you need to carve into stone, having a budget does not make more money appear magically and it won't reduce your expenses because magic does not really exist. In order to improve your financial position, you must make difficult decisions. These decisions relate to your lifestyle because you can cut your expenses easier than increasing your income.
Budgets are intended to help you stay in a cash format and not using credit sources. While credit can provide the means to have what you want now, that credit comes back to haunt you because, presto, you need more cash to pay back the credit which cuts into the flow later and makes it worse.
EXPENSES
Life is made up of spending money on lifestyle expenses. First, the secret, it is not how much you spend it is how much pleasure you get out of the money you spend. Next, think through all the expenses that you need in life. Generally, there is housing, transportation, communication, eating, clothing and miscellaneous. Yes, there are others and these are just big groups but as you work your way through these, then other ideas will pop up. Let's go back to the calendar, as you come up with these items, are they listed on your calendar? If not, make room for them and see how this changes your money. Changing your cash outflow is one of the easiest ways to solve a shortage problem and while it would be easiest to start with ways to save pennies and work up from there, making a significant change up from provides more motivation. Don't assume that you are locking in any of the potential savings, you are simply considering possible changes. Where do you spend the most money during the month? Consider that item first and consider what changes are possible. Think about rent payments, is there any way to reduce the rent expense? What about a smaller place? What about a roommate? Consider every item on the calendar and see if there are any possible changes that can save you money.
Saving money is one of those things that everyone takes for granted. The most often quoted example is the purchase of a daily Starbucks and how much money you can save by brewing your own coffee. After that, then it becomes a matter of packing your lunch instead of buying a lunch every day, the cost can be half that of eating out at lunch and, it will likely be more nutritional. Then there are the drawbacks like learning how to spread peanut butter on a white bread without tearing the bread apart, the jelly is a lot more cooperative.
But food is only the first step, what about making the most of clothes? Someone recently said "There are sales, I need to spend some money". Consider the definition of several words: Need, Want and Desire, these words do not have the same meaning. Everyone has desires and some of those can extend years into the future. Want seems more immediate and but 'Need' is the critical factor.
CONCLUSION
A budget is not an iron clad program, it is information that will hopefully, allow you to give greater consideration to each and every purchase. No purchase is too small and no purchase is locked in. When you lay out the needed payments and the associated income, you have an idea of what your finances look like but it is up to you to bring these to reality.