By BOB CUNNINGHAM
In personal finance parlance, it is known as “the B word.” And not in any sort of positive way.
Budgeting, defined as the excruciating act of creating a personal or family summary of income and expenses for the purposes of determining what can be spent and (hopefully) saved, carries such a negative vibe that some alleged PF gurus claim you can effectively manage your money without it.
Look, it’s really a matter of what you want to accomplish, in life and specifically when it comes to your money. Are you truly satisfied to wing it from week to week, month to month and hope you have enough to get by? Or are you willing to put in a little effort, in the boring form of crunching numbers, to improve your circumstances?
If you are among the vast majority of folks who want to make financial progress ongoing, there’s no way around some version of monetary accountability.
Still, that doesn’t mean it has to be painful… or a pain in the posterior. Budgeting is actually relatively simple, if you decide to keep it that way. Here’s how:
Know as accurately as possible your monthly take-home pay
True, determining what you make isn’t always that simple. Sales professionals who work on commission, for instance, can have a wide variation in what they make from month to month. But there are ways around this. First, determine an average income. Go back three months, six months, or whatever time-frame you believe can most accurately reflect your net pay, and come up with a “common” figure.
Obviously, if you are on salary, you simply need to take a peek at your paycheck, or observe the associated direct deposit in your bank account.
Now reduce that number by 20% for budgeting purposes. For instance, if you’ve determined that your average monthly net income is about $3,000, reduce it by 20% ($600) and work with $2,400 as you figure your budget. The 20-percent fudge factor allows for errors and anomalies while also demonstrating to you (eventually) that you can get by with less than you think. What if you only make $1,500 in a particular month… are you going to have to move back in with your parents? You may be nodding your head after reading this, but we both know you’ll do whatever it takes to avoid that scenario.
Make savings an integral part of any “spending” plan
Next take at least 5% of the $2,400 (10% is reommended), and mark it down as your monthly savings goal. Yep, do it now… this resulting $120 for socking away in our example is important – commit to it, even before you figure out what your bills are. That comes next.
Once you have your typical monthly income established, and your associated monthly commitment for savings, the next step is to mark down your fixed expenses. These are the monthly bills that are the same every month – rent or mortgage payment, car payment, TV/internet bills, cellphone bill (in most cases), loan payment to Mom and Dad, etc. It doesn’t matter what they’re for, if you pay them and they are constant, they should be included here.
Determine your expenses in two broad categories first
Now add up the total of your fixed expenses, tack on the aforementioned $120 savings figure, and come up with a total. Then, take that total and subtract it from the $2,400. The result is what you have available to spend monthly on what is referred to as discretionary spending – the costs that change every month, such as groceries, gasoline, and entertainment.
Guess what? You’re more than half finished. Not exactly bamboo under the fingernails, correct?
OK, sure, I’m not claiming this is as fun as Space Mountain on Halloween. But it’s a lot less costly.
Be willing to go back through previous spending history
Now comes a little bit of effort, because you need to go back through your on-line banking or credit card receipts, and determine how much you’ve been spending on those discretionary costs. My suggestion is that you separate them into the following categories: groceries, eating out, gasoline, entertainment, and miscellaneous.
After you have those figures determined for the last month (ideally, figure out three months’ worth of each category and average for a more accurate monthly reference), take the monthly figures and add them up. Compare to what your new budget “allows” you to spend. Analyze what you’ve been overspending on, and what you’ve been more reasonable about. Adjust accordingly. Let logic and common sense be your guide.
For instance, let’s say your discretionary spending amount that you determined from your income/fixed expenses/savings portion of the budget is $600 per month. And you’ve determined you’ve been spending closer to $900 per month. That means we need to find $300 to cut, but remember that we took your initial average take-home pay and cut it by 20 percent. That was $600 lopped off the $3,000 average monthly pay, yes?
Decide on spending cuts if needed, but you don’t have to go overboard
So whatever we determine needs to be cut, it probably doesn’t truly need to be as drastic because we padded the initial income figure by using only 80 percent of it. Are you with me?
In other words, you have some leeway… as long as you’re prepared to make some needed cuts when it’s obvious. Are you going out to the movies a lot, or do you mostly stay in and watch Netflix? How ’bout fast-food? That is the young adults’ most significant bug-a-boo, bar none. Are you on a first-name basis with the folks at Carl’s Jr.? If so, that has to change. Cooking at home typically costs a fifth of fast-food, and a tenth or less compared to eating at sit-down restaurants. How about at the grocery store? Do you buy a lot of processed and/or name-brand foods, or do you focus on produce, dairy, and generic stuff?
After you have determined all your adjustments, be sure that the first thing you do at the beginning of each month is put the savings away. “Pay Yourself First” is a universally accepted personal finance adage for assuring you save regularly regardless of your budget.
Ultimately, as long as you’re willing to do a little self-analysis with what you spend, and make some common-sense alterations, it can be pretty simple and only a little painful.
If nothing else, make a commitment to avoid high-interest debt
Last item: I could easily write 10,000 words about sensible budget decisions, cutting spending, etc. But that isn’t the point of this post. Instead, focus on the idea that getting basic organization in your financial life doesn’t have to be difficult and it truly doesn’t have to suck.
A huge take-away is this: Whatever path you go, do your utmost to stay out of debt… specifically, credit cards that – speaking of sucking – will suck the life out of any possibility of you getting ahead with your money and ultimately being able to reasonably afford many of the things and experiences you desire.
As always, thank you for reading.
DISCLAIMER: This post represents the author’s opinions only. In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment. Results are never guaranteed. Utilize the information as you see fit, make all money decisions at your own risk.