Budgets are Not for Wimps – Here’s Your Personal Guide for Getting One

There comes a time when it has to be done. Maybe you are running out of money before the end of the month; maybe you’ve missed a payment or two; maybe you just can’t figure out where your money is going and you want to know. Yes, it’s time to put the big boy or the big girl pants on and set up a budget. It’s really not such a “dark” place and it won’t be that painful. Here are the basic and pretty easy steps for getting this done.

Track Your Expenses for an Entire Month

Every time you make a purchase, even a candy bar from a machine, make note of it. Use an app like Evernote – something you can use from any device from anywhere. You have to know what you are spending your money on before you can do anything else.

Categorize Your Expenditures

Pull up your spending for the month and place everything under one of three categories – Necessities, Near Necessities, and Nice to Have but Not Necessary. Some people add a 4^th category – Totally Frivolous.

Calculate Your Income

This may be easy if your only source of income is a job for which you receive a regular paycheck that is the same every pay period. For others, this can be tougher, because income may vary (e.g., a college student has a part-time job but number of hours vary; or you are in business for yourself, and you do not have the same income every month). If you are one of those individuals whose income varies, you will have to take an average of the last several months. Or if you want to be ultra-conservative with a figure, take the lowest monthly income for the last several months.

Add Up the Costs of the Necessities

Let’s define necessities here. Rent, utilities, car payment, insurance, credit card bills, phone bill, gas, groceries and personal care items are necessities. Clothing should also be placed in this category, but you may have to estimate your average monthly cost. Medical expenses would also fall into this category but they are not recurring, so they will be placed somewhere else eventually. 

Subtract the Total of Necessities from You Income

Once you have done this, you have your “bottom line.” If that bottom line is zero or in the negative range, then you are going to have to make some changes – we’ll cover those later. With luck, however, your bottom line will be in positive territory.

Divide Up What is Left

This comes down to a matter of preference. How important are the near necessities weighed against the “nice to haves.” You have to make those decisions. One thing, however, is for certain: You must pay yourself first.

“Paying yourself first” means that you will need to put some money aside in some type of savings account. The “rule” used to be that 10% should go into savings, but that is just not always possible, especially if you don’t even have 10% left over. The reason you must do this is two-fold:

• Emergencies will come, like a trip to the doctor or dentist, and you need to have the funds to cover those expenses.
• You need to develop the habit of setting aside a certain amount of money. As you get further along in your career and begin to earn more, than the amount you save should increase.

Apportion What is Left

The amount that you have left is what is available for the non-necessities – this is the amount that you can choose to spend on whatever you wish.

Make Adjustments as Necessary

You may get a raise – try to put at least 5% in that savings and then apportion the rest to other things. There may be bad adjustments too. Your rent may go up; groceries are costing you more than before. You will have to make adjustments for these things as they occur.

The Bad Scenario – Your Necessities Cost More Than Your Income

This is not a good place to be for certain, and you will have to make some tough choices now.

1.    Determine exactly how much more you need to meet your expenses and to set a bit aside for emergencies.

2.    If it is not a large amount, can you find that money by cutting down grocery expenses or finding a cheaper phone or cable TV plan?

3.    If the amount is significant, then you will have to consider other options:

• You may have to “moonlight” by finding another small job that will bring in the income you need.
• You may have to consider reducing your housing costs by finding something cheaper to rent.

If the Culprit is Credit Card Debt

You obviously know that you will need to get your credit card debt down and set a plan for eventually eliminating it. Right now, however, you have a more immediate concern. Here is how to proceed:

1.    Call each of your credit card companies and tell them that you cannot make the current required monthly payment and ask for a reduced one. You will be surprised how much they are willing to work with you. They don’t want you declaring bankruptcy as they will never get paid.

2.    Once you have achieved lower payments, you have to implement a plan for eliminating that debt entirely – it is really the worst debt you can have. There are several options for doing this, so go online and find one that will work for you.

You have now been through the process of establishing a budget – it was not that hard. Now, you have a plan. You know exactly how much money you can spend on non-necessities each month. Set that money aside and when it is gone, it is gone – no dipping into that savings!