Budgeting: The Devil Is In The Details

In a nutshell, a budget allows you to make sure you are not spending more than you are making.  A budget can also factor in savings goals (such as down payment on a home), and paying off your debts.  Without a budget, most people are unable to accurately track their expenses in relationship to their income.

Most people unfortunately associate a budget with depriving themselves.  In fact, the complete opposite is true.  Developing a budget (either by yourself if you are single, together with your spouse if married, and if you have kids you may even want to complete this with your kids if they are teens), in an exercise in analyzing variables in your life.  Take a look at how constant your income is (if you are self employed it may be variable), and what expenses are fixed vs. variable.  To calculate your “burn rate”, add up all your fixed expenses.  Then, take a look at your variable expenses, such as clothing, entertainment, travel, etc.  With fixed expenses, look at how often they are paid (don’t forget an insurance premium if it’s only paid twice a year).  If your income exceeds your fixed expenses, now add in a 10% savings rate based on your net income (take-home income after taxes).  After factoring in the 10% savings rate, and if your income still surpasses your expenses and savings, start adding in fixed dollar amounts for the variable expenses (such as $500.00 on entertainment per month).

Implementing Your Budget

Creating the budget is half the story, however.  Once your budget is created, you will need to track each and every expense for a period of at least six months.  If you spend cash, write that down in a notebook you and your spouse both carry and reconcile.  If you use your debit card, note the transaction in your check register.  Ask for receipts everywhere you go, and keep the receipts in a safe place.  At the end of each month, enter all expenses into a spreadsheet in the categories identified in your budget. Google Sheets and Excel both have great templates for budgeting.  You will see that your spending may vary wildly from the numbers you originally input in your budget.  Be realistic if you are exceeding your living expenses.  Don’t beat yourself up- that is true for almost everyone!  To avoid the idea of budgeting as being “stingy”, allow yourself a certain budget in your most important variable categories. This can include costs such as dining, shopping, and travel.  Even if the budget amount is a very small amount in each category, you will feel less deprived psychology. Taxes are an important part of your budget, learn more about reducing taxes.

Information Is Power

Information is power.  As hard as it is to sit down and focus on your finances, there is no easy way towards financial power.  Isolating your basic living expenses, and then factoring in debt pay-down, savings rate, and luxury spending. All of this will empower you to live below your means, thereby creating true financial security.