Friday, March 7, 2014

The Dreaded B-Word

We don't want to use it because others may look down on us. We feel like we don't need to use it in everyday life so we don't. But we DO need to use it and be PROUD of it. It doesn't hold us back but actually gives us freedom! I'm talking about the dreaded BUDGET!

How do you keep track of your finances? Do you track your income and expenses at all? I know too many people who live paycheck-to-paycheck simply because they do not plan ahead. A budget is simply a tool, a plan before you get your paycheck, to tell your money where to go. It doesn't mean you have to live like a poor person, and others shouldn't look down on you because you live by a budget. One of the reasons we need a budget is so we can afford the things we want and be prepared for emergencies without going into debt.

Most ways people budget are to estimate their anticipated monthly income and assign amounts to certain expenses for that month. I do mine a little more detailed than that so that I can keep a balance in my account. I am a detail-oriented person and somewhat of a perfectionist, so my budget layout may not be the most simple out there, but it works for me and I wanted to share with you how I do it.

I list our total bring-home pay and everything that I pay out on a spreadsheet. Every bill. Every normal expense. I usually try to break it down into monthly figures. Some bills are on a yearly basis or every six months, so it helps me to plan ahead for these. This is an example of what it looks like:

To keep track on when your bills are due add in the due dates:

If you get paid on a bi-weekly basis, the best thing is to budget two paychecks for one month's expenses. That way you always have extra and get two extra paychecks per year. This really helps if you want to save more money. Just transfer the excess directly into your savings. You can also plan ahead and use that extra for fun stuff like vacations, to reward yourself for keeping a budget throughout the year.

This step is where my budget gets more detailed (and complicated) than other budgets. I go beyond the monthly amounts so I know exactly how much of each check must be set aside for certain bills. All you do is choose which income will cover which expenses and divide the total expense by how many paychecks you get during the period before it is due. This gives you each paycheck amount to set aside.

For example, I chose the first income to cover the mortgage/rent. That income is bi-weekly, so it will be two paychecks per month. That means setting aside $350 from each paycheck for that expense. All the expenses are broken down like this. The weekly paycheck covers the weekly expenses like gas and groceries and any other monthly bills from that paycheck are broken down into four pay periods within the month. It looks like this:

Now I go into more detail to keep my bank balance as well. The last column shows what is in the bank and the totals of each "set aside" line item for bills. According to today's date (and getting paid on Fridays), this person would have just paid their mortgage/rent so today is the first paycheck of the new period. Only one paycheck amount will be in the bank total. For the utilities bill that is due on the 15th, there will not be another bi-weekly pay period before the bill is due, therefore this paycheck fulfills the set aside amount needed to pay the bill. Here is what the full budget looks like with bank balances:

Now whenever you pay a bill, you would take the money out of the bank line item that was set aside for it. You don't have to worry whether you will have enough money set aside for that bill. Each time you get paid, you adjust the bank line item according to the budget. This way you are not living paycheck-to-paycheck and have a balance in your account at all times. It gives a little cushioning to your finances. Whenever you purchase something like gas or groceries, you can use your debit card and then deduct the amount from the bank total under that line item. It helps you keep track of your spending without having to use cash in envelopes.

I balance the bank amounts every time income is brought in. There are budgeting apps that can keep track of each line item detail like this but I prefer my spreadsheet method that I keep track of. It may be easier for you to keep it on your phone though. You set it up for each amount per paycheck and when you get paid, then the app does all the calculations for you. You enter when you spend money or pay a bill and it deducts it from the right budget.

It's always best to live by a budget. That doesn't mean you can't spend any money, but it means that you should only spend what you have set aside to spend. It keeps you from going into debt to have something right now. Instead, you may have to assign a line item to it and save for a few weeks until you can afford it without using a credit card. You will save money in the long run because you will not be paying interest for the same item you saved up for. It takes patience and diligence to afford what you want but you can do it!

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