CREATING YOUR BUDGET
I recommend creating 2 budgets. The first is the IDEAL budget, kind of like your target weight when you are dieting. The second is your WORKING budget. This WORKING budget is the budget you will use day-to-day to bring your spending in line. The WORKING budget will have a "model" portion that assigns reasonable amounts to each line item expense category. The reason for doing this is so that you do not overspend in one category leaving you with not enough money to cover your expenses.
For example, if you only have $20 to spend on food on a particular day, it would not be wise for you to buy a breakfast meal that costs $18. Instead, it would make sense to divide the $20 into three parts - breakfast, lunch, and dinner (for example). Assuming we divide the $20 into $6 for breakfast, $6 for lunch, and $8 for dinner, you know that if you only spend $4 for breakfast you are doing great and you will be able to have a nicer meal for lunch or dinner. On the other hand, if you spend $18 for breakfast, you will most likely be hungry for the rest of the day unless some how you find a meal deal (see my blog page, "Discount Dining with Kids") or someone treats you. Let's just keep my example simple, however, and just say you have to pay your own way.
By initially cutting up the proverbial pie in your model, you are working within a structure that gives you guidance on how much you should/can spend on an item. Without establishing these parameters up front, you will be spending money without context. During a discussion I had with a friend of mine she shared with me that her realization that although her mother taught her how to write checks, her mother never taught her how to balance her check book. Similarly, spending money without a budget is a little on the risky side.
For example, if you only have $20 to spend on food on a particular day, it would not be wise for you to buy a breakfast meal that costs $18. Instead, it would make sense to divide the $20 into three parts - breakfast, lunch, and dinner (for example). Assuming we divide the $20 into $6 for breakfast, $6 for lunch, and $8 for dinner, you know that if you only spend $4 for breakfast you are doing great and you will be able to have a nicer meal for lunch or dinner. On the other hand, if you spend $18 for breakfast, you will most likely be hungry for the rest of the day unless some how you find a meal deal (see my blog page, "Discount Dining with Kids") or someone treats you. Let's just keep my example simple, however, and just say you have to pay your own way.
By initially cutting up the proverbial pie in your model, you are working within a structure that gives you guidance on how much you should/can spend on an item. Without establishing these parameters up front, you will be spending money without context. During a discussion I had with a friend of mine she shared with me that her realization that although her mother taught her how to write checks, her mother never taught her how to balance her check book. Similarly, spending money without a budget is a little on the risky side.
The most important part of the model expenses in your WORKING budget is the amount you allocate (i.e., the share of the pie). The amount should be a realistic amount given your CURRENT spending habit. I once had a friend who was so desperate to get out of debt that she only allocated $40 for food for the entire month. I asked her how in the world she was going to live and she said potatoes. I do not recommend this drastic approach. It is unhealthy and you will not be able to keep with it. It is like in dieting, an extreme diet will only cause you to binge and your weight will yo yo.
The model amount should be a realistic amount given your CURRENT spending habit. For example, if you are used to going to Starbucks for coffee everyday your budget category where expenses such as these are covered should reflect consider this fact. Most people cannot stop something cold turkey and people rarely change over night. So, do not set yourself up for failure. Be reasonable but with the mindset of retraining those financial muscles that keep your WANT desires in check. Instead of 7 days per week, perhaps you can limit yourself to 5 days per week, then 5, then 4, etc. One of the reasons I had you tracking your expenses was so that we can glean from your spending habit what amount to set for each model expense. Remember, this is a lifestyle change. It will take some time but you can do it.
The model amount should be a realistic amount given your CURRENT spending habit. For example, if you are used to going to Starbucks for coffee everyday your budget category where expenses such as these are covered should reflect consider this fact. Most people cannot stop something cold turkey and people rarely change over night. So, do not set yourself up for failure. Be reasonable but with the mindset of retraining those financial muscles that keep your WANT desires in check. Instead of 7 days per week, perhaps you can limit yourself to 5 days per week, then 5, then 4, etc. One of the reasons I had you tracking your expenses was so that we can glean from your spending habit what amount to set for each model expense. Remember, this is a lifestyle change. It will take some time but you can do it.
Once you have set your model budget, the other section of your WORKING budget is the area where you will be recording your actual expenses. Yes, I know I asked you to track your expenses for 3 months but I did not say you never have to track your expenses thereafter. The tracking here is a little different than the tracking you were doing those first three months. In the first three months, you were data collecting. And, as you can see, the information was useful. It gave you a reality check, it gave you examples to do your need versus want analysis (and practice), and it gave you the information to create your budget and set the model expense amounts. Now that you have created your budget, you will track your expenses but it will be less tedious.
For example, if you have allocated $100 for your allowance, you can give yourself a break and put $100 in your wallet/purse and use those funds to pay for items that come out of your allowance. In fact, if you have a huge credit card debt, I recommend this cash method. I once had someone divide up their monthly allowance into two envelopes. The first was to cover expenses from the 1st through the 15th. The second envelope (which was sealed) covered allowance expenses from the 16th through the 30th/31st. If you ran out of money before the 15th, you had to make due with what you had but I expressly forbid this person from opening the 2nd envelope until the 16th. If you REALLY need more structure and accountability, you can divide up the allowance into how many weeks there are in the month. Once you have reset your financial default and you are no longer in debt (or no longer so much in debt) you should learn about using credit cards to leverage your spending power (e.g., see my blog post, "VACATION PLANNING STRATEGIES - FLIGHTS (working the credit card/airline miles programs to fund the flight").
For example, if you have allocated $100 for your allowance, you can give yourself a break and put $100 in your wallet/purse and use those funds to pay for items that come out of your allowance. In fact, if you have a huge credit card debt, I recommend this cash method. I once had someone divide up their monthly allowance into two envelopes. The first was to cover expenses from the 1st through the 15th. The second envelope (which was sealed) covered allowance expenses from the 16th through the 30th/31st. If you ran out of money before the 15th, you had to make due with what you had but I expressly forbid this person from opening the 2nd envelope until the 16th. If you REALLY need more structure and accountability, you can divide up the allowance into how many weeks there are in the month. Once you have reset your financial default and you are no longer in debt (or no longer so much in debt) you should learn about using credit cards to leverage your spending power (e.g., see my blog post, "VACATION PLANNING STRATEGIES - FLIGHTS (working the credit card/airline miles programs to fund the flight").
Now, let's turn back to the structure of the budget. The two essential components of a budget are (1) categories and (2) amounts. We already talked about how to set the right amount (for the model budget). As for determining which categories to include in the budget, most of the consumer expenses should come out of your "allowance" category. For us, we have a separate category for the kids. Also, going out to eat as a family is its own separate category. As I have mentioned in my blog in other postings, going out to eat is a WANT expense we actually want to budget for and keep. We really enjoy going out to eat. However, we do it cost effectively by leveraging various deals. (see my blog post, USING GROUPON AND RESTAURANT.COM (AND OTHER SUCH SITES) AS AN INTEGRAL PART OF YOUR BUDGET.)
Now, if you have stayed with me this far, I am pretty impressed as it was a lot of reading. Let me now pull it together by showing you a sample budget.
My notes in red on the sample budget explains a few questions that you may have had upon reviewing the image.
The next part in the series will discuss how to modify your budget and move you closer to your IDEAL budget through goal setting.
The next part in the series will discuss how to modify your budget and move you closer to your IDEAL budget through goal setting.
No comments:
Post a Comment