How To Get Your Finances Under Control – Step 4 Create a Budget AND Follow It!
This article is step 4 of the series called How to Get Your Finances Under Control
One of the most important steps on your journey to getting your finances under control is establishing a budget. While creating an effective budget takes time and a little number crunching, the freedom your budget will provide you is well worth your time.
People in general tend to make a budget more difficult and complex than it really is. A financial degree or expensive version of Quicken is not required. All you really need is a pen, a sheet of paper and the basic ability add and subtract.
The most difficult part of the budget is following it. We’ll discuss both as we jump in to creating a budget, but the focus will be on following it. After all, if you don’t follow it, than creating it is a waste of time.
What is a budget?
A budget is basically a plan that spends your money on paper before you actually receive it. It is simply writing down your income, and all of your expenses for the next month and looking at the difference. The difference will tell you what you need to do, and will allow you to control your spending.
When and how often should I create my budget?
Critically important is the concept of spending your money on paper before you receive it. I get paid twice a month, and we have our excel budget spreadsheet complete before the 1st day of the upcoming month. Sometimes a little earlier, sometimes on the very last day of the month. We aren’t perfect and as example for this month (July) we didn’t get it complete until the 9th. We just had a lot going on.
Your budget should be done monthly. It is far too complicated to try and create one budget that works for every month, as your required expenses will change. So create one monthly, and make it specific to that month.
Creating a budget
As I stated earlier, the basic tools for creating a budget are a pen and a pencil, and I would highly recommend that your first budget be done this way. There is something about writing your budget by hand that gives you more ownership of it and ownership inherently tends to make you more accountable.
If you are married like I am, you and your spouse should do the budget together. This is VERY important. Both of you should have equal input into the budget and in the end agree to it. If one person doesn’t participate or one person doesn’t agree the likelihood of the budget being followed by both parties is low.
Being a computer science major, I abhor writing and prefer to type everything. So our budget was and is done using a Microsoft Excel spreadsheet. Here is the excel budget spreadsheet template we use. I also use You Need a Budget as well, as both offer different benefits. If you haven’t tried You Need a Budget, check out my You Need a Budget review for all the details. It’s a slick piece of software. If you prefer to manage your finances online, you can check out my article that overviews online money management tools.
We keep our budget very simple. We list all expected income at the top. For us this is generally my paycheck, two company reimbursements I get for my cell phone and my internet access and my income from blogs and online stores. Sometimes this section will also list other misc income such as rebates, dividend checks, and other smaller items. Some people like to list interest income on their accounts here, I don’t as it isn’t significant, and I don’t like to spend it, so it doesn’t get listed. I also don’t include medical expenses or Flexible Spending Account income as they are a wash each month.
Once you have a line item for each of your expected incomes, total them up on the next line and call it Total Income.
Next, list all of your expected expenses for the upcoming month. This is done by determining your spending categories. Here is a list of the categories we use: Housing, Utilities, Food, Transportation, Clothing, Personal, Education, Recreation, Savings, Credit Cards.
Personally, I find it hard to track my expenses at this high of a level (note: I am a very detailed person), so I have additional categories under these like so:
Repairs and Tires
Registration and Taxes
Mom and Dad
Term Life Insurance
My wife and I then determine an amount to put next to each one of these categories. We determine the amount by looking at past expenses and by discussing how much we will need for the upcoming month. For example, clothing. Generally we don’t buy clothing each month, but in we before summer and before school we do. So May and July are usually big clothes budget months for us. Now that we have been on a budget for a while, the categories are much easier to do and generally very close to if not exactly the same as the previous month
We then total up the amounts for all expenses, and put a line item underneath that says Total Expenses and we put the total next to it.
Right below your Total Expenses, with maybe a little space in between put Net Balance and next to that put your Total Income minus Your Total Expenses and this will be the Net Balance for your budget.
If you have a positive amount, congratulations you have some extra money to put on your debt if you have debt, or if not you have extra money to save or give.
If you have a negative amount, you’ll need to trim your expenses as you budget is currently spending more than you make. Spending more than you make by the way is the primary reason people are in credit card debt. Our goal here is to spend LESS than we make so we can save and become wealthy.
Trimming Budgeted Expenses
Trimming expenses can be difficult and I’ll write a more comprehensive article on trimming expenses down the road, but if you spending more than you make, you have to start cutting.
Update: Since writing this article, I’ve started a new series called Money Saving Mondays where each Monday I share a money saving tip. Check it out, it’s full of great ways to trim expenses and save money.
Generally our big culprit is eating out, and this should be a primary candidate for trimming. Other areas are cable television, entertainment, and cell phones. Another area to take a hard look at are personal luxuries. These are things like pedicures, massages, getting your hair cut at fancy hair places, spas, etc.
If you have cut all of these and you are still negative than you might have to begin making some hard choices, we did. How much are your car payments? Do you have too much house? Do you have recreational vehicle payments? These are items you might need to consider selling to get yourself back on track.
This was what we had to do. We enjoying RV camping, and we had a new Dodge truck and a 34 foot travel trailer. I sold my truck, payed cash for a 2001 Nissan Sentra and we sold our camper. We aren’t currently RVing, but plan to get back to it later.
In order for your budget to be complete, the Net Balance has to be zero. Remember, we are spending all of our income on paper BEFORE we get it, and we aren’t spending more than we earn. So a $0 Net Balance is the goal.
Once you have your budget and all of your money is spent for the upcoming month, it’s time to formal agree. This is a critical step in following your budget. If you are single, you are going to have an agreement with yourself, or you might even consider having a close friend or family member be your accountability partner. If you are married, than you spouse will be your accountability partner.
Once my wife and I both agree on our budget including the amounts in each category, we do a little pinky shake to agree on it. This is our little way of stating our agreement, and committing ourselves to following it. By doing this we also agree to hold each other accountable.
Funny, put there is something about that little pinky shake that really makes us commit to each other to follow the budget. I know for me, if I see something in the store I would love to have, that little shake always visualizes in my head and makes me think twice.
Following a budget
As I stated early on, the hard part is following your budget. Following it doesn’t require book knowledge, it requires you to manage yourself and your behavior. For a refresher on this read Step 1: Recognition again.
There is no magic step by step process to succeeding here, but here are a few things we do to stay on track:
- Have weekly budget meetings and review budget status and make adjustments if necessary
- Before spending money on anything questionable, my wife and I agree on it. If one of us doesn’t agree, we don’t buy it or spend the money
- If an unexpected expense occurs (i.e. your car breaks down) conduct an emergency budget meeting, and you AND your spouse or partner have to agree on what will be done and how you will pay for the expense. Generally in this situation, we use our emergency fund (more of that below).
- Track every expense, and subtract it from the budget amount so you know how much you have remaining. When you run out, you don’t spend anymore money OR you move money from another category that has money. Using a tool like my spreadsheet or You Need a Budget will really help.
We generally have our weekly budget meeting on Monday nights after our younger children have gone to bed. I say generally as if we’ve had a hard day or we’re too tired, we’ll postpone it until another day when we are feeling up to it. We do this as we find our meetings much more effective when we aren’t tired, grumpy or stressed.
We agree on all expenses. So if I am out on Amazon.com and see some new shiny gadget that I want (note I said want not need), I don’t buy it without getting her approval first. Neither of us buy or spend money without the others approval. This makes us accountable to one another. The only exception to this is we sometimes allocate blow money to ourselves. Blow money is money we can choose to do whatever with.
An emergency fund, while not required to start your budget will certainly make following it much easier. An emergency fund is a stash of money that is set aside for emergencies only. Step 5 of the How to Get Your Finances Under Control will discuss establishing an initial emergency fund.
Each time you buy something, track the expense and put it in a category. I use Simple D Budget to track our budget. It’s a very simple and easy to use program that offers a number of various graphs that make reviewing your budget very easy. This is what we use to review our budget each week.
If an First You Don’t Succeed, Try Try Again
Don’t over manage the budget. The first few months we started, I would get all upset when we overspent a category. I ended up stress more about the budget than I did before we had one. Be willing to adjust and if you overspend a little, don’t get over react. You aren’t going to get it right out the door, and it will take you a few months to get used to budgeting and determine the right amounts to put in each category. So if you overspend, it’s not alright, but it isn’t the end of the world either. Just move money from another budget category or pull from your emergency fund (just put it back).
In my case, I was getting so upset about it that I was causing my wife to not feel empowered with our money and causing her to feel like she needed my approval every time to spent anything. Trust me, this is not what you want to do. After budgeting now for about six months we pretty much have it down and we get better at it every month.
Start your budget now!!
Don’t wait, start your budget today. I cannot encourage you to do this enough. You will feel less stressed, and the weirdest thing is you will all of the sudden find money that you didn’t know you had. There is nothing like the feeling of going through the money, knowing you have enough money to pay the bills and not having to worry that you will overdraw your checking account!
1 Corinthians 16:2 – On the first day of every week, each one of you should set aside a sum of money in keeping with his income, saving it up, so that when I come no collections will have to be made.
Proverbs 21:5 – The plans of the diligent lead to profit as surely as haste leads to poverty