Budgetting and frugality are important components of self development. If we are to be materially well off, we need to spend less more than we earn so that we have savings
Some say that the rich invest and spend the rest; while the poor spend most and have nothing to invest.
Thanks to Faith and Finance
---------- Forwarded message ----------
From:
Faith and Finance <tim@faithandfinance.org>
Date: Thu, Jul 26, 2012 at 3:50 PM
Subject: How Create a Budget in Less Than an Hour
Hi Jorge.Saguinsin,
Your personal budget is a way for you to track two things: income and expenses. It's basic addition and subtraction and you need to keep one lower than the other.
I know you're saying, "That's obvious! - keep expenses lower than income." Yes, it's the basic principle of live on less than you earn. Unfortunately, the average American household has over $5,000 of consumer debt, so this simple principle hasn't caught on for everyone yet!
Ok, I get it. Spend less than you make - but there's one problem. I DON'T KNOW HOW MUCH I SPEND!
This is what keeps a lot of people from starting a budget in the first place. It's also the first step in making a budget that works, so read on to get started with your budget.
1. Track Spending For a Month
Wait, I thought you said it takes less than an hour! It does - just gather your bank statements and sort through them.
You'll start to see some common categories and you'll want to add up the expenses in each category to see what you've been spending your money on. Here are some common budget categories to help get you started
Groceries
Dining Out
Mortgage/Rent
Charity
Phone
Utilities
Cable
Car Payment
Gas
Car Insurance
Auto Maintenance
Home Health and Life Insurance
Pet Care
Student Loans
Entertainment
Credit Cards
Retirement Savings
2. Write Down All Income
For most people, their main paychecks are pretty stable and predictable. If you have side income that's not really consistent, I would take 80% of your average side income and add it to your steady income to get an idea of how much you're earning each month.
Once you have a total figure from step one, you can subtract it from the figure in step two to find how much extra you have each month. If it's positive, congrats! If it's negative, well, don't freak out yet. The next step is to look at your expenses in detail to see how much money is going towards each category. This is where you might need to make some adjustments to your spending.
3. Control Variable Expenses
There will be certain categories that might not change that much: rent, giving, insurance, student loans. You'll notice them as you look through your expenses. You may not be able to trim these down, and that's normal.
Now look at the categories that seem to have no cap on how much is spent. This is where you might be cutting back some in your spending. Groceries, eating out, entertainment, phone, pets, and credit cards can spin out of control sometimes.
This is exactly why you're creating a budget.
It's not a problem to spend your money on entertainment and fun stuff. It's just a problem
when the amount you're spending is out of sync with your income
Here are some suggested guidelines for setting the limits in each category. While some would say to use gross income (before tax and other withholdings), I would recommend setting your budget on the actual income you receive from each paycheck (net value).
Charitable Giving - 10-15%
Saving - 5 - 15%
Housing - 25 - 35%
Food - 5-15%
Utilities (phone, internet electric, cable, etc) 5-10%
Transportation - 10-15%
Medical/Health - 5-10%
Clothing / Personal - 5-10%
Recreational / Entertainment - 5-10%
Debt - 5-10%
Again, these are just suggested guidelines. Your budget might have a category or two that seems too high - you might not even use some of these categories on a regular basis.
4. Be Conscious About Your Spending
The idea behind conscious spending is to break the habit of spending whenever you 'feel' like it. Emotions have just as much of a role in spending as knowledge does, so getting the emotional side under control will help you put your knowledge to use!
If you're having trouble with overspending in certain areas, try using envelopes for a trial period with certain categories. For example, your cell phone payment may be automated...no envelope needed. Your grocery bill may fluctuate more than you'd like it to - so set out an envelope. The same can be done for eating out or entertainment. You don't need a lot of categories to be successful with envelopes, start small and you'll see how effective it can be!
Or...create a 30 day rule
The ultimate discipline for controlling your cash is the ability to say NO, and to let a period of time go by before you commit to the purchase. This works best with big ticket items like a computer, TV, car, hobby items, or home décor. The main idea is to kick that impulsive buying habit we can all fall prey to.
Here's a budget spreadsheet that gives you the flexibility to change quite a few variables. Just click the link to download it from Faith and Finance.
Now you don't have any reason not to set up a budget - you have all the tools!
Get ready for tomorrow's email about reducing your credit card interest and reversing bank fees.
Take care,
Tim
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PO Box 43, Kirksvile, MO 63501, USA
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