The
budget (a monthly cash flow plan) is the most important step in getting and keeping control of your personal
finances. As the
old saying goes, "Those that are failing to plan, are planning to
fail." With 70% of all Americans living paycheck to
paycheck and spending $1.22 for every $1.00 earned, it's no wonder that
personal financial failure is more common than success.
The Small Business Administration says that the number one reason
small businesses fail is due to a lack of planning. The financial
affairs of your household are in effect, nothing more than a small
business. The goal of every business, small and large, is to make
profits. In regard to your household business, profits equate to
savings. So, the number one purpose for a monthly budget is to
establish control so as to protect and maximize your savings (see the SAVING
section).
For the Christian, the Bible is very clear to point out our responsibility to plan (see Money Management Bible Study - "The Importance of Planning"). For a detailed step-by-step guide to using my budget organizer, go to the materials page and download the file "How to use the Budget Organizer". You can also download all of the necessary forms to set up your own budget book system, or download our Budget Planner spreadsheet. This program will do all the calculations for you. The Budget Planner uses Microsoft Excel. If you don't have MS Excel, you can download a FREE copy of Open Office, the global standard in free Microsoft compatible office productivity software (see the links on the materials page).
It is our goal to provide you with the instruction and tools you need to get started in your journey towards financial freedom!
Don't let another month slip by.
START NOW!
FAQs
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What is the difference between a "budget" and a "spending record"?
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Is it important to make budgeting a joint effort (if married)?
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How do I transition from living week-to-week to living on a monthly budget?
If defined by a lawyer it might sound like this (take a deep breath): "A budget is a voluntarily designed and implemented control mechanism that is jointly agreed upon by all parties who are responsible for, or actively engaged in, the exchanging of economic resources with commercial business entities inside or outside of the local community, whether for items of substance or merely for activities resulting in entertainment or pleasure. It is not an instrument that is to be crafted by one party for the primary purpose of defining power or inflicting pain upon the party joined at hand. It is merely a tool designed to restrain and guide in the disposition of economic resources for the benefit of those concerned."
A spending record is a report that shows the spending results of the previous month(s). When the month ends, the expenses from the previous month are recorded. This allows you to keep track of trends in your spending habits.
A budget is a plan for spending in the next month. By starting with your projected next months earnings, you can put together a spending plan for the upcoming month. Many of these future expenses will be fixed expenses such as mortgage payments, insurance, certain utilities, consumer debt payments, taxes, etc. The budget plan is the most important tool in managing your personal finances. Once the budget for next month is developed, you will then need a means of tracking your spending throughout the month to ensure that you stay within your plan. Adjustments are often required but are made "on purpose" so as to maintain control of your finances (see the materials page for budgeting tools).
Many people have tried to set up a household budget and have failed. There are four key elements in order for a budget to be successful.
IT MUST BE WRITTEN
If you don't write it down, then it's not a budget; it's just that
simple! It really doesn't matter what you write it on or how you
keep track of it, just write it down! It is often the man who
thinks that he is capable of keeping the budget details in his
head. No matter how good you are with numbers, a budget must be
in writing.
IT MUST BE DONE TOGETHER
If you live alone, this step does not apply to you. But
assuming that you are sharing the responsibility of making ends meet
with a spouse, son, daughter, cousin, aunt, uncle, stepson,
stepdaughter, or just a roommate, then you both must be on the same
page and in AGREEMENT as to how the money will be spent. A chain
is only as strong as it's weakest link. The key is to make
spending decisions together, and on purpose.
IT MUST BE COMPLETED BEFORE THE MONTH BEGINS
A true budget is a spending plan for the future. Not to be
confused with a spending record which is merely a summary of how much
was spent in the past. Once the plan is established, there must
then be a method to track its progress.
IT MUST BE EASY
Very simply, establish a spending plan, track the plan, spend less
than you make, and then repeat that process monthly. We have all the
tools you need to set up a budgeting system for your household.
The materials and forms are available from this website and are
FREE! They have been proven by many families to be easy to use yet very
complete (see the materials
page).
A zero based budget is simply a budget that is reset at the beginning of each month. So each month you start over with a clean page as you establish the next months budget. One of the reasons that many people have failed in their budgeting attempts is due to difficult accounting requirements of the budgeting systems they have tried to use.
Many budgeting systems require that you reconcile your checkbook register with your previous months budget plan. This method only makes a simple process difficult. Although it is critical that you manage your checkbook, we teach that you use the budget plan to guide you in your monthly spending while also ensuring that you do not forget to accurately balance your checkbook each month. Our budgeting system (see the materials page) is very simple yet powerful. It can be used as a manual system or on your computer (requires MS Excel or Open Office).
It is extremely difficult if not impossible to maintain a successful personal budget if all those who have the privilege to spend are not actively engaged in the planning process. This would include being in agreement before the month begins as to how the projected income should be spent.
The most freeing thing that will ever happen as you establish your financial foundation is when you have completed the transition from living without a budget to living with a budget. Remember, 7 out of every 10 Americans are living paycheck-to-paycheck (week-to-week) or as I have heard it called hand-to-mouth.
Your first goal is to sit down and establish a monthly budget on paper (allocate every dollar you plan to earn next month to a spending category) using Forms 1, 2, and 3. If you are currently paid weekly or bi-weekly (as many people are), you will probably be a bit confused as to how you are going to make this monthly budget plan work. This is usually due to the fact that most people have "0" cash reserves and are only able to pay bills as the checks from work have been deposited. What a miserable way to live! You can change that with a little effort and planning. Start by downloading a copy of my Transition Worksheet. This tool will help you organize your budget using 1 to 5 pay periods per month. Remember that this is only a tool to help you until you can transition to a monthly budget.
The yellow tabs in the budget book have been designed to help you during the transition period. Yellow tabs are associated with categories that are usually discretionary (not required every month). These categories will need to be minimally funded during your transition from a no budget life to a budgeted life in order to increase your cash reserves. As painful as it might be, you must make this very important first step from living paycheck-to-paycheck to getting control of your money. You must either temporarily increase your income (part-time work or sell something) or cut your expenses in order to jump start your budget. This would be a great time for a garage sale.
I recommend that you try to build up a cash reserve that is equal to at least two weeks worth of expenses. This will take a lot of the pressure off of you as you plan and implement your monthly budget. Remember, the forth step to making a budget work is "it must be easy". After your consumer debts have been eliminated (see 5 Step Plan), you should set a goal to build up a cash reserve equal to one month's expenses. This is the way I have lived for years, and I can tell you from experience that it makes life so nice. On the first day of every month, my checking account has enough money in it to pay all of my budgeted expenses for the up-coming month (plus a $1,000 pad that I do not even show in my check book balance). When the bills come in I simply pay them and record them in the budget under the appropriate category. As the month progresses, money comes in (income checks deposited) and money goes out (checks for expenses) of my checking account. The beauty of it is that I know the money is already there for the known expenses as long as I stay within my budgeted amounts for each category.
Until you have accumulated some cash reserves, you will need to operate your budget on a weekly or bi-weekly basis. It is the same concept as the monthly budget but instead you will need to break your income and expenses down into pay periods. If you are paid bi-weekly, you could break it down into two week periods. You should look at this only as a temporary transition to a monthly budget plan.
People with irregular incomes might include those with commissioned sales and those that are self-employed. If you have an irregular income, you should establish your initial budget based on an average income month. If you don't have an income history, you can use the lowest projected income for the upcoming month. After several months of budgeting, you will discover your minimum budget requirements. It is important for those with irregular incomes to maintain above average cash reserves.
Prioritize your expenses by importance. The budget book is set up using a priority system (most important to least important). As money comes in, pay those expenses with the greatest priority (not urgency). When you get an income check in, you must ask yourself, "If I can only pay one thing, what would it be?" Keep asking yourself this question as checks come in. You must stick to your plan and not be persuaded to pay an urgent request from a creditor when you should be paying an important bill such as your house payment or utility bill.
It is highly recommended that those on irregular incomes have a goal to get themselves in a position where they are able to budget the upcoming month's expenses on the current month's income. In other words, on the first day of the new month your checking account balance should be equal to the planned budgeted expenses for the upcoming month. Basically, this means that you would be one month ahead. This will eliminate much of the stress of living with an irregular income.
The envelope system is a simple method to control spending in variable expense categories in your budget. After budgeting next months expenses for a particular category, you would put the actual cash required for that category in an envelope. It could be done weekly or biweekly or for the entire month. For example, if you budgeted $200 for entertainment/recreation for next month, you would put the cash in an envelope. When the cash is gone you would stop entertaining and recreating. It is that simple. It is one of the strongest methods of control and is very effective for discretionary categories.
For over 15 years, Mike Coe has helped thousands of people put together successful budget plans and has a vast amount of experience helping people find a plan of action to reach their short, mid, and long-term financial goals. For budget questions feel free to contact Mike (contact us).
