How To Develop A Budget That Actually Works For You
Budgeting, every financial blog talks about it. Then most of them ignore it. That’s because budgets are complicated, right? Well… they don’t have to be.
Darren and I use a simple budgeting process. That’s because he hates math and I hate wasting time on unnecessary work.
You can’t earn or save when you’re doing admin.
Debts get paid off when you earn or save. Dream houses get bought the same way.
So budgeting, it needs to be done, but it doesn’t have to be hard, it just has to work.
This is what we do. It could work for you too.
The Shocking Truth
Surveys show that nearly 70% of Americans don’t even try to keep a formal budget. That is, they don’t know how much they spend and how much comes in every month.
That’s why we’re all in so much debt. It’s why so many of us live from paycheck to paycheck. You can’t take informed and valuable action with your finances if you don’t even know what your finances are.
Rich People Are As Guilty As The Rest Of Us
Take a walk around Wall Street. Go into the bars and clubs frequented by bankers. Ask them if they have a personal household budget. 70% will say no.
Then ask, politely, how much they earn every month and how much goes into savings. You’ll be shocked to find that it’s often between $0 and say a couple of thousand. That’s people who take home $100,000+ a month who only save 2% of their income. Worse, they manage other people’s money for a living!
It doesn’t matter where you are in life or where you are going. You can do better in your financial life with a budget.
Why You Need A Budget
You need a budget because it’s the core tool of money management. When you fully understand what money comes in every month and what goes out – you can start to act on either of those things.
You can save money by cutting down on what goes out. You can earn more money by putting more effort into what comes in. You can start to think about what tomorrow will be like.
Better still, the act of budgeting means that you need to keep paying attention to your finances. The more you pay attention, the more they will motivate you to take action.
A good rule of thumb is that nothing in life gets better without you taking action – this is equally true of your finances as it is with your health, relationships, etc..
How To Keep A Budget
You have two options as to where you keep your budget:
- On a piece of paper.
- On a spreadsheet or other electronic document.
Does it matter which you use?
Technically, no. People did keep budgets before computers came along and they did manage their money. However, I am going to say that electronic is often more convenient. There’s no crossing out, no need to rewrite when you want to move figures around, that kind of thing.
I use a very simple spreadsheet that I made in MS Excel but you could make one in Google Docs, Open Office, etc. if you don’t have Microsoft Office. They’re free to use, forever.
What Goes Into My Budget?
Now, if you ask an accountant this can get very complicated, fast. But I am not an accountant, I am mother, wife and businesswoman and I don’t need complexity.
So, if you boil it down to the basics there are only 2 things you must track:
- What you spend or EXPENDITURE.
- What you earn or INCOME.
That’s it. Now, I am not saying it will be a piece of cake to get this information. In fact, if you’re not tracking these things. It’s often easiest to start today and track forwards rather than to try and piece together the information from the past.
Income doesn’t just mean your wages, though it might. It means every source of money that comes into your life including:
- Tax rebates
- Rental income
- Side gig earnings
- Share dividends
- Bank interest
To get an accurate picture of your income, you want to look at a few months of history. Why? Because income can fluctuate (sometimes very substantially) every month. So, you need an average of a few months. To get a feel for what your real monthly income is.
The good news is that this is easy to track for most people. Grab your bank statements and add up what came in each month. You can do this right now.
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This is a bit harder to track. If you’re a receipt hoarder or pay for absolutely everything by card, you may be able to piece together your history today.
If, on the other hand, you are like I used to be – you pay in cash, you chuck receipts away, etc. start this process from today and move forward keeping receipts and where possible, paying by card.
These are the common areas of expense found in budgets:
- Could be a mortgage payment, could be rent. It should include utility bills, insurance, taxes, etc.
- All your expenses for your car, not just any hire-purchase payments but services, oil, gas, etc.
- Netflix, Hulu, Cable, TV, Movies, Concerts, Sporting events, you know what constitutes entertainment in your life.
- Cell phone and the Internet. Enough said, right?
- Clothes, charitable donations, and health insurance.
- Savings, Taxes and other regular investments.
- Everything else you spend is lumped under “miscellaneous” for example, pet costs, school costs, childcare, vacations, etc.
Need to save more money?
Once You Have Your Budget Share It
I don’t mean share it on Facebook. I do mean, sit down with your family and anyone else in the household and explain where money is going, where it’s coming from and your plan of action to reduce outgoings and increase incomings.
Then update them regularly. A budget won’t help if other people don’t know it exists or how much progress is being made.
Revisit Your Budget Monthly
Budgets need maintenance. Children start or leave school. People get promoted or change jobs. Subscription costs go up. That kind of thing.
So, you need to revisit your budget, and I recommend at least monthly, on a regular basis to make sure it’s still an accurate reflection of your financial life.