Step 1 of 7 - Budgeting
Before you can get were you want to go, you have to know were you are. Sometimes this requires a lot of time and energy to figure out, and maybe even a few steps backwards, but often times the hardest part of setting out on a new journey is getting started.
"One definition of maturity is learning to delay pleasure. Children do what feels good; adults devise a plan and follow it." - Dave Ramsey
"Now no chastening for the present seemeth to be joyous, but grievous: nevertheless afterward it yieldeth the peaceable fruit of righteousness unto them which are exercised thereby." - Heb. 12: 11
In other words, things that are best for you in the long run, are often very difficult to do at first.
Telling you money how to behave
People who do not have a budget, or at least not one that actually works, are often perplexed at were their money went. The truth of the mater is that Money is fluid. It's constantly moving form one place to another; sometimes those places are good, sometimes they are not. Since money in and of its self is essentially amoral, unemotional, and otherwise clueless, it's up to us, as stewards of our money to tell it exactly what to do.
If we do not take control of our money, just as if we do not take control of ourselves and our own destiny, life will do it for us, and we will end up wondering how we got to were we are. A much better idea is to make a plan, and then make that plan happen. Essentially this is what a budget does for our money, it tell is how to behave. When we get good at telling every last dollar of our money how to behave, and make sure that it does exactly what we wanted it to do, then we start to see some amazing things happen.
- We find out that we have more then we realized, or that we can do more with our money then we ever though possible.
- Financial issues start to lessen, along with stress and anxiety over our lives.
- For those who are married, doing a budget may cause some major fights at first, but eventually, if both parties are willing to work together, it will help strengthen communications and unity within the marriage.
- It will help you to change other aspects of your life and your character for the better.
Don't barrow money just to get something now, thinking that you have plenty of extra money in your budget to pay the monthly payments on it.
Consider this: If you borrow $4,0000 to purchase a set of furniture, most furniture stores will sell their financing contracts to finance companies. You will end up borrowing at 24% with payments of over $200 a month for 24 months. The furniture will end up costing you over $5,000 when you add on the finance charges. If you instead save up for 18 months, and pay cash, not only do you save yourself a lot of money, you have a very powerful bargaining tool that can help you get a discount.
If you teach your kids to do the same with cars, they can literally save themselves millions of dollars over there life time.
Budgeting is really all about priories. Making sure your needs are met before your wants come a still away all your money; leaving you to put your groceries on high interest rate credit cards. Budgeting may have a lot of numbers and other boring stuff in it, but what it's really about is behavior and maturity.
You must always remember there is a big difference between a need and a want. Sometimes it may seem difficult to understand were something really sits, especially when we've become accustomed to a certain level of living standards. Real needs are things like: shelter, food (and I'm not talking about dinning out at your favorite overpriced restaurant), transportation (no, this is not that trip to your favorite vacation spot), clothing, and utilities (cable TV not included).
Below is a very good list of priories. These priorities become especially important it you do not have enough to pay for all the necessities. In such cases, go down the list as far as you can until you run out of money. If you have irregular income, you will need to prioritize your list of expenses to decide what gets paid for first until the money is gone.
- Pay God first
After all it's all his anyway. Also known as tithing, and other acts of giving.
- Pay the Government second
Usually you don't have a choice anyway. Otherwise known as income tax.
- The four basic necessities of life (in this order):
This isn't just rent or house payments, but also includes the basic utilities like water, sewer, trash, and electricity that keep your home a livable environment.
This is for basic groceries. Do NOT include dining out or other unnecessary and expensive food items.
You can't go to work or church naked after all.
- Basic, necessary Transportation
If you don't have a lot of extra spending cash, then don't be going on any unnecessary trips, and look for alternate, less expensive means if needed.
Buying an expensive new car does not fit in this category either.
- Other essential bills:
If you don't protect yourself, your family, and other important stuff, you can very quickly end up in a financial mess that can quickly destroy your budget and your financial future.
Just be careful, some kinds of "insurances" are more rip-off then protection.
- Health Care
Such as doctors visits and prescriptions.
If you are in school or have kids in school, paying for fees and supplies is very important as well.
Tuition and other major costs of school should really be paid for by saving up.
This includes things like basic phone service (not a cell phone if you can't afford it), basic internet services (only if you really need it), and other important items that keep us connected and functional with the rest of the world.
At this point we are only talking about minimum payments on credit cards, student loans, car payments, etc.
And yes, this one is listed last in this section on purpose. You do need to pay back your debts, but you shouldn't put your health or other necessary things as risk to do so.
If your don't take care of yourself first, you'll only find it that much more difficult to pay back what you owe.
- A few extras to make life bearable:
This should not be a large amount of money, but just a few dollars to rent a red-box movie, or get a used book at the bargain store, or better yet going to the local park or library is free.
Again nothing too expensive, but you don't want to sit around being board all day either.
If you have a lot of extra time on your hands, try spending it looking for a second (or a first) job, or learning something that will help you get a better job.
- Blow Money
Give yourself a little cash each month, so you can deal with life as it happens.
- Dining, gifts, and other items so long as they are not extravagant.
Keep in mind we are still trying to only do a few extras at the point, to help make life a little more bearable, and not to blow what ever we have left over.
- Beyond this will depend on were you are at financially:
We'll get into these in more detail in other lessons
- If you have any debt, use all the extra money you can to pay it off faster (excluding the 1st mortgage on your primary home).
- If you don't own a home, but are debt free, you may want to put extra money into savings for a down payment.
- If you are debt free, own a home (even with a mortgage), start putting your money to work for you with some wise investments.
There really is no reason why anyway should have to retire broke, if you just make a few wise decisions about your money and investments.
- If you are lucky enough to still have some money left over at this point, then you probably already financially well off, and don't need these lessons.
This is were you can start to be more extravagant with your spending, but still be careful not to go overboard, always plan ahead before spending, and always remember to be generous with your good fortune.
The above list is not the order in which you actually spend your money, but rather to make sure you budget your money for the more important items that come first on the list, before allocated money to something less important near the bottom of the list.
The real challenge after making the budget is sticking to it. Fortunately that are some useful tools that can help with both making and sticking to your budget.
If you are disciplined enough to stick to your budget, then all you probably really need is a good tool to help you track it. Here are are some good examples of budgeting tools and works sheets.
If you are not disciplined at all, you may need to take more drastic measures, such as using cash within an envelop system.
What budgeting tools you use is up to you. What's most important is that you find a plan you are able to stick to, that works for you, and actually works. Not just once, but continually, over and over every month for the rest of your life.
Either way, I would strongly recommend that you fill out the Allocated Spending Plan sheet to start off with. Regardless of what tools you may use, this one sheet will get you started, and can be a real eye opener to how you should be spending your money.
Another important aspect of a budget, is savings. There are three main reasons to save money:
- Pay for large items or expenses that do not occur every month.
- Have a Rainy Day Fund in case of emergencies and/or hardship.
- For investing and retirement.
The money you plan to save, needs to also fit into your budget. If you have money left over after making your budget, don't just leave it sitting there, make it do something, put it to work or have it provide some security for you. If you have large items to pay for once a year, or every few months, that you need to plan for, be sure to make that a part of your monthly budget as well. For example, if you have a yearly bill of $1200, then budget $100 a month for it ($1200 / 12 months = $100 per month).
If you have a house, you most likely have an annual property taxes, which could cost thousands of dollars. Likewise, you'll probably have other maintenance items that need to be taken care of yearly, or even every 5-10 years you'll need to replace the water heater, dishwasher and/or central air system. How about the roof, about every 20 years; how old is your house?
All of these kinds of things can be manage in what is called a Sinking Fund. A sinking fund is like a savings account that allows you to put money into it every month to save up for these kinds of big items. Most of us won't have the time or energy to manage a bunch of sinking fund for every item in our home. Instead you may just want to build up a Rainy Day Fund.