Take control of your finances using a simple budget
By Irel Wong on 10/24/20
Photo by Michael Longmire on Unsplash
I remember soon after I got married I kept hearing that word popping up over and over again and I kept dodging it until I couldn’t anymore – it’s that lovely little six letter word called BUDGET! At that time I couldn’t see the importance of one, it didn’t feel right giving it my attention, and even worse – I just wasn’t ready to commit to a life of discipline in my spending. I don’t think I’ve ever said these words out loud before so hopefully my wife isn’t reading this. But, over time our finances kept skyrocketing out of control every month, every year until I couldn’t avoid it any longer. It was time to face the music and finally commit to a budget if I wanted to be financially responsible. If it’s one thing I’ve learned about money and marriage – is that If the money isn’t right, the marriage ain’t gonna be right either and for those of you who are in the same situation I was in, I feel your pain. But there is hope! Hallelujah! If I did it, so can you and I’ve been married for more than twenty years so today the technology and information has made it much easier to do. Whatever your reason is for wanting to create that killer budget of yours, you are at the right place so don’t feel hopeless. Recognizing that a budget is important to not only fixing your finances but also steering it towards your future goals means you are already on the winning team. Whether you already have a budget or about to start one, make sure you get it done now and make sure you have one that is realistic to you personally! The hardest part is to start but once you do it and get it right, the hard part is over. Take the time and do it, you won’t regret it and if you share finances with someone make sure to involve them in the process. Having transparency in your finances is key to success. It may take some adjusting at first but you will find that the freedom it offers will far outweigh the drawbacks.
What is a budget
A budget is a visualization of your income and expenses over a period of time. Most budgets are started in small time frames first and then rolled up into longer periods. Personal budgets are usually month to month while business and government entities will have theirs quarterly and annually. A budget can be as simple as putting your expenses on a spreadsheet and adding your paycheck and other incomes and then calculating the balance after paying all expenses. It can also be complex where forecasting models are factored in along with running analyses on past data. Either way it’s done, the fundamentals remain the same which is to give you a picture of your financial standing concerning your income and expenses for that particular time frame you are looking at.
Why budget?
As I mentioned earlier, prior to having a budget my finances weren’t in good standing at all. I had little insight into what I owed and had no idea what was coming in or going out. I thought all this could be done out of memory and I could just wing it because being on top of your finances is so easy right??? Well, I found out the hard way after running up thousands in credit card debts, having my wife unhappy with me because of my lack of financial sense, and totally destroying our credit scores – all because I hadn’t sat down and worked on a budget. You may be reading this and telling yourself you don’t need a budget because your income is already far above what you spend every month or maybe your business is doing very well and you have your expenses under control. My question to you is, why not get it better? Why not go the extra mile and improve what you already have a good grasp on? Here are a few reasons why having a budget is key to your financial wellbeing.
To see the big picture of your income vs spending – Without having a draft of your income and expenses, you’re not seeing the full picture. You may have a good sense of what’s coming in and what’s going out but a budget provides more than. It also highlights the bigger conversation you need to have and that is what is your budget telling you? Where is your income coming from? And where are the majority of your expenses? If your goal is to have multiple streams of income then your budget should propel you to work on other avenues to make more money. Facing the truth about your own finances may not be fun but it’s a rewarding experience. You may find that you are spending too much in a particular area that doesn’t deserve that much of your money. Being able to identify and tackle it early can be the difference between having a comfortable life later on versus you falling short. Make sure you are using your budget to see your financial story.
To see where you can adjust – Do you see anything that you are paying for monthly that looks ridiculously expensive? It probably is. Do you see something that you are paying for that you don’t use or need anymore? Now that you are looking at it, it’s time to decide to get rid of those unneeded expense items. Your budget is telling you it’s time to make adjustments so you can steer your finances where you want it to go. Fine tune your budget and make the necessary changes quickly to avoid pitfalls.
To help in your financial planning – What are your financial goals? Your plans for the future? Your budget will be able to help with those plans. Finding expenses that don’t align with your goals will highlight even more where your priorities lie. Having a financial plan is great but having a way to reach those goals is even greater. Your budget should tell you were to cut back and where to be channeling your funds. What you spend on speaks volume about what you are investing. If you don’t have a clear picture of what you are presently investing towards your future then your goals may never be achieved.
To be on top of your credit – Are you spending more than you earn? Your budget will tell you that and if you are, most likely you are spending more on credit and loans. Having more debt can be devastating to your credit if you continue to spend more than you earn. Having a budget and making adjustments will allow you to not only decrease your credit expenditure, but also find the means to pay them off. Your budget will show you where to cut back so you can live within your means and protect your credit so you can access it when it’s really needed.
Photo by Sharon McCutcheon on Unsplash
How to create a budget
Creating a budget can be intimidating at first. Getting all those credit card bills, mortgage statements, car loans, insurance, electricity and the normal day to day expenses can be daunting. The truth is, that is the easy part. The more challenging part of creating a budget is figuring out those irregular and inconsistent income and expenses you have. Maybe you don’t have a steady nine to five job that doesn’t give you a regular income. Maybe you have gas expenses that are higher during a certain time of the year when you use your vehicle more than other times. Maybe you make payments quarterly on a particular expense item and others you make annually. Being able to add these into your budget is key to making it effective. What you want to do is figure out how much it is monthly. For your income, you want to find the lowest you earn monthly and use that to start. You can always adjust as you get more comfortable and confident after a couple months. For irregular expenses, look back at a twelve month span, add the total over those twelve months and then divide by twelve. This will give you an average of what your expenditure is for that particular bill. This should give you a good platform to start working on your killer budget. Here are some steps to creating your budget:
Gather all expenses – Get all your expenses together and start adding them to your budget entry. Whether you are using a spreadsheet or an online budgeting tool, having all the information you need will make creating your budget much simpler. As you make a list of your expenses, don’t forget the one offs, the irregulars and the outliers. Forgetting to add these to your budget will not only give you a big surprise when they become due, but they will also set you back financially and your budget won’t be useful. Take a look at your prior year expenses if you have it readily. This will give you an idea of those expenses that only come around once in a while. If you share expenses with someone, make sure you involve them in this process. This will allow you to collaborate on the information and will provide accountability with each other.
Gather all income – This should be the easy part unless you have multiple streams of income or you are budgeting for a business. For most people it’s getting your W2’s, your 1099’s or looking at cash and check receipts for the last few months. For others it may be looking at your electronic receipts, direct deposits and bank statements. I would recommend using the month with your lowest income but also compare it with your monthly average to see how much of a difference there is. Make sure you take into consideration incomes that are seasonal and irregular just as you do your expenses.
Deduct your expenses from your income – Once you have all your income and expenses, the final task in creating your budget is to deduct your expenses from your income. Hopefully you will see the difference with a positive number in black but if it’s negative and in red, don’t freak out it’s not the end of the world. Your budget is doing what it’s designed to do and that is to show you where you stand in your finances. Keep in mind also that if you used the lowest monthly income, it doesn’ compensate for the months that you will have higher revenues coming in so that may be the reason for the negative number. In this scenario you will want to see how using your average monthly income rather than the lowest would make a difference.
What to do after you create your budget
Review your budget for any missing or incorrect entries – After you are done creating your budget, go over it again to make sure you don’t have anything missing. Have someone that you trust or share your finances with review it as well. It’s easy to overlook simple expenses that you don’t consider worth adding to a budget but if it’s a cost to you at any point then it should be included. Also, look at the amount carefully. It may not be exact but estimate as close as you can. Over time this will become easier and as you continue to look at your finances, you will get a handle on your budget.
Take action! – This is probably the main reason you created a budget in the first place, so you can make some decisions about your financial well being going forward. Are you showing a positive number or a surplus after you have deducted your expenses from your income? If so, then you may consider putting more into your savings, paying off high interest debts, reinvesting some into your business, taking advantage of investment opportunities or just putting more towards your retirement. Whatever you decide to do, having a surplus in your budget is always a wonderful thing and everyone’s dream. But, not every budget ends up with a surplus. There are budgets that reveal shortfalls of which some may not be a surprise. Some businesses operate with a negative cash flow for a while to get off the ground but know that it’s necessary for the short term. This strategy involves more borrowing or infusing more capital into the business until things turn around. For others, If the result continues to be negative then you have some decisions to make regarding your expenses. Take a thorough look at what you can cutback on, what services you can do without and where you can downsize. This may be difficult at first but it’s also necessary if you want to avoid a much worse fate down the road.
Forecasting yearly expenses
Using your monthly budget to see how it would look quarterly and annually is a good thing to do so you can have a high level view of your finances in a longer time frame. If you look at how much you spend on a particular item throughout the course of a year it may make you reconsider whether that item has that much value to you. Showing your income annually may also reveal that it’s time to switch careers or readjust your business strategy. If your goal was to be making $80,000 per year but your budget shows that you only make $55,000, then this should allow you to work even that much harder at reaching your goal.
Forecasting your expenses and your income is really simple. Once you have your monthly income and expenses, just multiply it by 3 to get your quarterly results and multiply it by 12 to get your annual numbers. Here is an example:
Tracking your budget vs Actual Expenses
A good habit to have is to track your actual expenses against what you budgeted for. This will help you identify areas you need to make adjustments. You may have budgeted only $300 for restaurants but you ended up spending $500. Tracking your actual expenses not only helps you to budget better, it also shows you leaks in your spending where you need to put a stoppage. I personally download my banking activity and use a spreadsheet to group my spending so I can see what I actually spent compared to what I budgeted for. Most banks offer the capability for you to download your activity so this shouldn’t be difficult. Keep a record of these monthly activity reports so you can group them and then take an average after a few months. This will help you adjust your budget as you continue.
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Update your budget
Life is always changing and so will your budget. As you go through the year, life changes will also create changes in your finances. Your income may have changed or you may have paid off a debt that you need to remove from your budget. Maybe you have taken on additional expenses that need to be added to your budget but as you continue to have life adjustments, make sure you update your budget as well. Remove debts that are paid off, adjust expenses that have increased or decreased, add new income or expenses but keep updating your budget each year or after any life changes that have an impact on your finances. After a few years you will notice that your budget will look nothing like when you started.
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