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Wednesday, November 9, 2011

GETTING ORGANIZED: Creating a Household Budget for Success, Part 1

Hello out there!  So, for this week’s post, I thought I would give some insight on how to get organized and on a budget.  One of the themes of my posts to date have been the importance of establishing a budget, it is essential to any financial plan.
There are TWO steps in creating a Household Budget for Success…1) The Budget itself, and 2) The Cash Flow Plan. Today we are going to focus on Step 1: The Budget.
What is a Budget? 
Well, according to Investopedia.com, a BUDGET is an ESTIMATE of the given REVENUE (INCOME) and EXPENSES over a specified future period of time. THAT’S IT! If you look at the definition clearly, you will see there is really nothing to be scared of.  First: it’s an “estimate”, which means the amounts don’t have to be PERFECT, or EXACT.  Second: it’s for the “future” which means it’s done ahead of time. Third: it’s for a “specific period of time” which means it can change.  You are not locked it for the rest of your life! I change my budget all the time depending on the circumstance.  The important part is that it’s a PROACTIVE way to manage your money.  A budget is not a dream crushing, fun killing monster, it’s just a PLAN!  You will find that you actually enjoy yourself MORE when you live on a budget.
So now that we know what a budget is, let me tell you the best (in my opinion) and easiest way to build one and live on one. This post requires some participation!
DISCLAIMER: the following is an example of the way I create a simple budget, the budgets used in personal counseling are a lot more complex, the example in this post is to help you get started and to give you some general ideas on how a budget is created.
Let’s start simple, depending on how organized you are, this may take little or a lot of effort.
1.      Get out a piece of paper.
2.      Write your monthly income at the top of the page.
3.      Under your Income write the following Expense Categories:
·         Giving (charity, tithes, offerings)
·         Savings
·         Rent/Mortgage
·         Homeowners Assoc  Dues
·         Insurance
·         Child Care
·         Loans
·         Credit Cards
·         Internet
·         Cable/Satellite
·         Electricity*
·         Gas*
·         Telephone*
·         Water*
·         Trash*
·         Groceries*
·         Eating Out*

4.      Fill in your “estimate” of what you typically spend in a month next to each category.  Some items are going to be easy, your loan or credit card payment, and rent are items which are typically fixed. However you might have a hard time estimating your “discretionary” categories (* see asterisk).
5.      Subtract the Income Amount from your total Expenses Amount; the result is called NET INCOME.
Whalah! You have a budget!
Do the amounts left over make sense?  Does your NET INCOME match the amount you have in your pocket at the end of the month? 
This is where most people get in trouble.  They try to manage their life on this initial budget (based in memory), but after a week or two of failing, they give up out of frustration…Why? Is it because you can never budget for everything? Something always comes up that wasn’t in the budget. TRUE, but that’s not why the budget didn’t work...most likely it didn’t work because it’s not based in reality. Even the most detailed budgets fail to predict every dollar down to the cent…that’s why a budget is a living document…it will change…just embrace the change.
So at the beginning of this post I told you that I was going to show you how I create a budget.  Guess what?  We are not done.  This way is going to take a little more effort on your part. 
1.      Get out a piece of paper.
2.      Pull out your last month’s worth of paystubs. Or bank statement.
3.      Write down the amount either the paystubs or the bank statements say you take home in a month; whatever is most accurate.
4.      Under your Income write the following Expense Categories:
·         Giving (charity, tithes, offering)
·         Savings
·         Rent/Mortgage
·         Homeowners Assoc Dues
·         Insurance
·         Child Care
·         Loans
·         Credit Cards
·         Internet
·         Cable/Satellite
·         Electricity*
·         Gas*
·         Telephone*
·         Water*
·         Trash*
·         Groceries*
·         Eating Out*

5.      Pull out your last month’s bank statement (checking/savings).
6.      Look through the record of transactions.
7.      Fill in the amounts spend on each category based on the bank statement.
You may have to make a category for CASH withdrawals if you can’t remember what you spent the money on.
6.      Subtract the Income Amount from your total Expenses Amount; the result is called NET INCOME.
8.      THIS TAKES A LITTLE MORE BRAINSTORMING…On a separate piece of paper, list of all the expenses that occur more sporadically, like DMV Registration and Costco Memberships. Include the amounts for each category and put the list to the side. This will be use for the Cash Flow Planning step.

Whalah! This is your TRUE budget! At least it was last month!

Does your New NET INCOME match the amount you had in your pocket at the end of the month?  Probably a lot closer than before.  Hopefully this amount is not negative…more on that later…today we are just building a budget as we stand today.

Now, go over the 2ND BUDGET and ask yourself the following:

1.      If I could go back to first of the month, would I change the way I spent my money? For example, perhaps you didn’t mean to spend $150 on Starbucks??? JUST GUESSING.
If the answer is “yes”, then change the amount in the category to the desired amount.  If the answer is “no”, then keep everything the same.
2.      Is there any category that isn’t on the current list that should be based on your spending from last month? (Like haircuts or gym membership)
If the answer is “yes”, then add the category and put the amount you spent next to it, or put the amount you want to spend next to it.

THIS IS TOO EASY, RIGHT?
I counsel people all the time, and it never fails how wrong they are about what they actually spend…my philosophy is to start small, this is a good exercise to do if you are NOT facing an emergency, but know that you need to get organized!  I also believe that if you are going to be successful, you should start with little changes and build your way out. 
By doing this exercise you have uncovered TWO THINGS:
 1) Where you thought your money was going, and
2) Where it actually went!
Like I mentioned last week, a budget is a process, it takes time to perfect.  You can’t start on a journey if you don’t know where it begins... 
So, this week I want you to DO something!  For the next week try to build a budget, you will have two versions, one based on memory and one based in Actuals. NOTHING FANCY, JUST DO IT ON PAPER!
Next week I will take you to the next step in budgeting…Cash Flow Planning…it’s the HOW after the WHAT!
Check back…MsMoneyGuru

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