Budgeting 101

Budget…when you hear that word, what comes to your mind? I find that there are two typical reactions. People either get excited and want to let you know they are currently budgeting or they are ready to exit the conversation and become very uncomfortable. Regardless of your feelings about budgeting, finances are one of the top stressors for people. We have already looked at how debt can overwhelm you and throw your life out of balance. If finances are stressing you out, creating a budget might be the key to finding success in this area of your life. I want to give you a quick budgeting 101 crash course.

My Story

After graduating from college, I found myself beginning my teaching career with student loan and a little credit card debt. Fortunately, I did not have a car payment or house payment at the time. I thought that if I could manage the minimum payment amounts and maybe put a little extra on the payment, I would be in good shape.

No one teaches you in school how to handle your finances and begin tackling this debt. I was doing my best to keep things under control. About 10 years ago, my church offered a series on finances. It was based off the principles presented by Dave Ramsey. What I learned helped me to get my finances under control, pay off my debt, and purchase my first home. The freedom this brings is life changing.

The Excuse

I frequently hear, “Well that is good for you, but I will be paying on my student loans until I retire.” People seem to have resigned themselves to being strapped to debt. It has become such a way of life that they don’t even have the drive to get started paying it off. What is worse, they take on more debt because they don’t see any way out of the pit and figure they might as well add to it.

The good news is that no matter how impossible it may seem, there is hope for you to get your finances under control! You can approach this in a variety of ways. Some people want to find ways to increase their income. While this is a great idea, let’s be honest. The majority of us are already struggling to find balance in our life and adding more jobs to the mix is unlikely to help. It is also true that if your spending is not under control you will just spend the extra money that you make and it will not be used to pay down those debts.

Why a budget?

Where does a budget fall in to the mix? If you don’t control your money, your money will control you. The only way to gain control of your money is to create a budget and tell your money where you want it to go. Creating a budget that works is a process and will take some time. Be patient with yourself as you work through the steps necessary to create one.

Creating the Budget

Creating the budget can be messy and uncomfortable. I’m just being real here. We often avoid getting started budgeting because we don’t want to face the reality about what we are really spending our money on. This is a case where ignorance is not bliss. It also takes some time to get it right. If you have a hard time with the budget the first couple of months, don’t give up. It will take some time to figure out how to make your money work well for you. Don’t give up!

Step #1

Start tracking your expenses. Make a list of all your bills and how much you spend on each. Look at all the other spending and try to put it into categories. These could be things like groceries, gifts, clothing, pets, etc.

Step #2

Look at how your total spending compares to your income. This is where it can get really uncomfortable. If your spending exceeds your income, you are going to have to get really honest with yourself. In order to create a balanced budget, you want to make your income work for you without exceeding it.

Step #3

Find places to make some cuts. If you are going to pay off debt and not exceed your income, you will need to find as much extra money as you can. If you found that you spent a large amount of money on clothing, think about how much is really reasonable to be spending each month. That reasonable amount is what you will allow yourself in your budget. Clothing and food were two categories I had to limit.

Make some calls to see if you can reduce some other expenditures. I just called about internet service and was able to get a higher speed for $10 less than what I was currently paying. Think about that tv package. Consider reducing it, at least for the short term in order to reach your financial goals. Perhaps changing your cell phone provider could save you money on your phone bill. All of these reductions will give you extra money to put elsewhere in the budget.

Step #4

Take your first stab at creating your budget. Start with your total income. List out each category of expenditures and the amount you will put towards each. If you have extra money left over after applying the minimum to all your bills, put it towards an emergency fund. You will want to save at $1,000 before hitting the debt. If you don’t have money for those emergencies that come up, you will end up going farther in tot debt to cover them.

After the $1,000 is saved, you can apply the extra money towards the debt. I would recommend using the debt snowball that Dave Ramsey talks about. I will share more about that in a future post and/or you may want to read more about it in his book The Total Money Makeover.

Step #5

Refine the budget. Chances are slim that you were able to stick to your budget 100% the first month. You may have found that you forgot a category of items or maybe an expense came up you only have at certain times of the year. Commonly missed things are not accounting for birthdays, Christmas, car licenses, or taxes.

The most important thing is to make adjustments and try again. This can be challenging if you have lived the majority of your life without ever budgeting. However, I can promise you that once you get it down, it will be very freeing. It may take a couple of months to work out the bugs.

Don’t Give Up

The most important thing is to never give up! It is hard to stick to a budget. No one ever said budgeting would be easy. Despite the challenges, remember how hard it is to live in financial crisis. Living paycheck to paycheck is hard. It causes you to be in a constant state of stress, even if you don’t want to admit it. This discomfort of creating a budget is only temporary. Once you see yourself starting to win with money, you will be so thankful that you stuck with it. You can gain control of your money!