Tuesday Tip of the Week: August 15, 2017
Basic Budget Creation
Good morning and welcome back to my Tuesday Tip of the Week here at Budget Boss. This week is all about the namesake of my website, budgets. Yesterday I spoke about the importance of having a budget. I mentioned how having a budget provides clarity, allows for a positive cash flow and gives you the opportunity to right wrongs in your spending. In today’s post, I am going to go over a simple plan on how to create your own budget. I have seen budgets as simple as some numbers jotted on a napkin to as elaborate as spreadsheets and interactive pie charts. The point of the budget isn’t to be either simple or complex. The point of the budget is to provide clarity and ultimately allow for spending discipline. You implement the budget to find out what you are wasting your money on and then eliminate the waste. It is my personal opinion that everyone should have a budget. There is no difference between those who have a lot of money than those who don’t except that the debts and consequences can be far greater. Often times with higher earning potential, debts can get more out of control, thus making the budget even more necessary. Let’s take a look at some basic steps to creating your own budget.
1) Know Your Income
This one seems extremely simple but many struggle with knowing exactly what they make every month. You might say well I make $50,000 a year so that’s roughly $4,100 a month. Wrong! The reason it is wrong is taxes. Taxes take more of your income than anything else in life. You must know your after tax income every month and use that to create your budget. Far too often people over estimate their income and under estimate their expenses. When you do this you can end up with shortfalls and gaps. You should do the opposite. Income should be rounded down and expenses should be rounded up. The only outcome if you do this is extra money at the end of the month instead of not enough. That is a far more desirable situation.
2) Know Your Expenses
Most of us know our monthly expenses and yet some of us find it hard coming up with these funds. My simple budget pie chart includes the categories of Housing, Life, Transportation, Debt Repayment, and Savings. It is imperative to know exactly what you spend on 4 of the 5 categories. The one category that gets confusing is obviously the one called life. It is this category that can get out of control. For the most part, the other four categories are fairly consistent. You must know what you spend every month even if it takes breaking out your bank and VISA statements. When you know exactly what you spend every month you can then eliminate the waste. You can then also find areas of which you can trim your fixed expenses if necessary.
3) Find Your Break Even Number
Your break even number can be best described as the number you have every month when you subtract fixed expenses from your income. I consider the break even number a representation of the “needs” in your life. You need to pay for housing. You need electricity and water. You need food and sometimes you need transportation. This number does not include the “wants” of your budget. Things like restaurants, shopping, road trips and pizza delivery are not essentials. Your break even number is what you must have taken from what you make every month. This number will show you exactly what you should have left over every month. If you have a number that is far too small once you make this subtraction than your fixed expenses are far too high. Look to trim anywhere you can by cutting out transportation, paying off debt, finding cheaper housing or cutting cable TV. If you have a number that is fairly healthy but also find yourself broke every month then you are spending too much on life. This means your variable spending is out of control and you need to dig a little deeper into what you are wasting your money on. This leads me to my next point.
4) Find the Flexibilities in Your Budget
I mentioned how there are certain things that you cannot go without. You can, however, change your cash flow every month by doing simple things. Debt is often a huge dent in people’s monthly budget. Once removed it frees up a lot of extra money. Creating a plan to eliminate debt is a big help for most people’s budget. Transportation is often something that can be reduced. If you do not need to commute than why spend so much money on a car and gas. Some people pay far too much on housing and can use that extra money elsewhere. Small things like unused memberships and bank fees can be taken away to add more savings. Going after what you spend is huge but also finding ways to make more money. If you do not waste a lot of money but also don’t make much money then you have to prioritize the effort to make more money. Ideally, you will trim the waste and try to make more money as well.
Download the Monthly Budget Worksheet to help you get started:
https://budgetboss.ca/monthly-finances-worksheet-download/
5) Refine and Rework Your Budget
Now that you know what you make and what you spend it becomes necessary to limit the “Life” section in your monthly budget. If you do this then you will find that meeting your monthly needs will be a lot easier. The section entitled savings is also very, very important. Something I hear a lot is that people cannot save for a rainy day because they don’t have any money. I must call bullshit on this one. I think everyone can be saving at least a little bit of money every month. Sometimes that means making more money if you can and sometimes it means cutting out luxuries if you have to. Either way, your income should match your expenses and one of your expenses must include savings. By refining and reworking your budget you can include this and over time this habit will allow for far more savings to take place. The refining of the budget is more about reflection and discipline than the money saved and it is something we all should do periodically.
Dave Ramsey puts it pretty bluntly. He states that the math involved with making a personal budget is at the 5th-grade level so any idiot should be able to do. I agree with him but I take a different approach. I don’t think it is stupidity that makes people bad with their money. I believe it is a lack of knowledge and a lack of urgency. We have all become accustomed by society to think there will be an endless supply of money and credit in life. This couldn’t be further from the truth. Eventually, the gravy train stops and you have to get off. The key is to get this system in place before it is too late. People often think that budgets are beneath them and aren’t necessary. Large corporations use budgets and so do large countries. The ones that use them wisely flourish while the ones that don’t struggle. Your personal finances should be no different.
Thanks for reading our post and don’t forget to tune in tomorrow for Wednesday WTF where I will discuss you break even number and paying yourself first. Have a great day friends!!
“Most of the things we buy are wants. And we call them needs, but they’re wants.” – Dave Ramsey
https://budgetboss.ca/why-you-should-have-a-dedicated-budget/
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Joseph James Francis is a Financial Advisor. You can find him on various social media platforms and at budgetboss.ca