Simply put, a budget is a plan of how you are going to spend/save your money. The total from all categories listed on your budget should equal your total income. The budget can be set to any time length, however, I find that a monthly or bimonthly budget makes the most amount of sense because that is the usual frequency of paychecks and billing cycles.
A budget is an opportunity for you to set out on paper what you believe is the best way to spend your money, before temptations and bad judgment lead you astray. Now, despite society's message that we are "too hard on ourselves," I have found that at the very bottom of most of our troubles is too much self-love and pride, not self-loathing. Seriously, isn't it because we believe we are meant for greater things that we get so down on ourselves? Instead, if we do not expect anything and view everything that comes our way as an undeserved, unexpected blessing (e.g., SO glad I got that ticket only for speeding instead of speeding and running the red - LOL) would we not believe we are THE luckiest person in the world? I know that my statement is extremely controversial so I will not go further. However, if you are TRULY serious about making a change in your financial situation, please use my controversial statement to prove me wrong and take my challenge. Track your expenses and prove to me that your spending habits have had nothing to do with your financial situation and that at the very core of your purchasing decision you believe you NEED the item when you actually just WANT the item.
Tracking your expenses is a necessary pre-cursor to creating a budget. It is from this data we will identify many of the expense categories and subcategories. So, track ALL of your expenses for the next 3 months. I mean everything, including the coins you use to feed the meter and do laundry. Buy yourself a small, cheap notebook and keep it with you jotting down all of your expenses. I bet you that your largest expenditure will be in what I call "discretionary spending." That is fancy word for "allowance." So, let me tell you what is discretionary spending: restaurants, presents, knick knacks, coffee/drinks, books, etc. It is the category that is the catchall for all expenses that are not necessity or obligation expenses.
There are only a handful of things that are necessity expenses. There are other expenses that are not necessarily "necessities" in my mind but very prudent and wise to have. I will explain further later. For now, let me identify the necessity expenses: rent/mortgage (for your primary place of residence only), utilities (electricity, phone, water, trash, etc.), childcare/dependent care (assuming you work), transportation cost (car payments, bus/train passes, gas, vehicle maintenance and repair, etc.), and food (specifically, groceries), and for those of you who attend a religious organization, tithe.
Obligation expenses are credit card and charge card bills. You will find that most of your expenses on the credit cards were non-necessity items. However, I list them as "obligation expenses" because you have an obligation to pay the money back. Now, I know many people, when they are in the depths of financial despair are tempted with the promise of a new beginning through bankruptcy. However, I will submit to you that unless you correct the spending habit and your default money sensitivity (for the lack of a better word), the bankruptcy will only provide you temporary relief because in a few years you will find yourself in the same situation. I hope you don't, however, look at the people around you who have gone through bankruptcy and really be honest with yourself. Remember, this is done in your own heart, in secret, so you can be as honest as you want without fear of judgment. Remember, the purpose here is to really take stock and it is going to be very uncomfortable and most of you will not want to do it. However, if you are one of the few people who have had enough, please try my method.
Now, in the paragraph above I said "spending habit" for a reason. Life is unpredictable and out of our control. If you ran up your credit card due to some unexpected emergency, illness, or circumstance such as a failed business and you do not have any bad spending habits, I say, give yourself a break. Do not die under the debt. You are more precious than money. If you are eligible for bankruptcy relief, take it, that is why those laws are there. Do not condemn yourself or fear judgment by others, that is their problem, and not of their business to boot.
So, start tracking your expenses. Now, why do I want you to track for the next 3 months? It is because each month brings with it something special - in January you have New Years, in February you have Valentines, etc. There are tons of "special" days, along with special days that are specific to your situation - birthdays, anniversaries, etc. so that one months of tracking will not give you a clear indication of your spending habit. Also, with only one month of tracking, you will rationalize your expenses and try to excuse it. If you are saying, "no, I won't"...again, that is why I challenge you. EVERYONE I have worked through this process has responded the same. A famous person once said, "What has been will be again, what has been done will be done again; there is nothing new under the sun. Is there anything of which one can say, Look! This is something new”?
It was here already, long ago; it was here before our time." What this means is that most of our reactions and responses are common.
Now, while you are tracking your expenses, there is much to do in terms of "resetting" your financial default.
The next part will be Part 2: Resetting Your Financial Default.
The next part will be Part 2: Resetting Your Financial Default.
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