Why Budget and How

In these financial times, it is wise to examine our budgets and see what areas we can cut make to make our money go further. What budget, you may ask? Please tell me you have a budget. A budget is priority #1 if you're serious about getting out of debt, saving more money, starting a business, or pretty much any other financial goal you may have.

I know, I know. You know how much money you make, you pay the bills with it every month, and spend what's left. By the time the end of the month rolls around, you don't have anything to save and you're not sure what you spent it on. You must not be making enough money, right? So what do you need a budget for? That's what I thought at least, until at the urging of my wife I tried it one month.

A budget can show you if you are making enough money every month. Many are surprised once they actually track their expenses and income to see they actually spend more than they make.

Others discover that they are blowing all their extra money on eating out or something else that they could cut back on.

In order to make your money work for you instead of always working for your money, you MUST know where it is going.

Here's what I do. Set up an Excel spreadsheet, if you and your spouse for instance get paid twice a month each, set up four columns (four total paychecks in a month). In each column, type the amount you get paid each time. Give a conservative estimate if your check can vary each time. Divide the number of days in a typical month (say 30) by the amount of times you get paid (4 in our example). Round down. So for our example we get 7.

Have I lost you yet? Hopefully not. So you have 4 columns with the amount you and your spouse get paid each month. Now below each column, create a row using your 7 day increments - 7, 14, 21, and 28. Insert a column to the left labeling the top row as "Income" and the second row "Dates Paid".

It should look something like this:

Now gather all your bills for the month. In the column under "Income" and "Dates Paid" list each of your bills. Even include things like gasoline and eating out, along with things you may only pay every 6 months or a year, like insurance.

Which ones must be paid by the 7th, which ones by the 14th, the 21st, and the 28th of the month? Put the amount you pay for that bill under the appropriate due date, beside the column with the name of the bill. Like this:


So this individual makes $992 on his first check of the month (be sure to use your check amount after taxes). By the 7th, he owes Netflix, Verizon, etc. Thus these numbers are under the column 7. By the 21st he owes his house payment.

So now you know that on your first check of each month, you have to pay 6 bills. You also know the amount of these bills compared to the amount you get paid. If you're good at Excel, you can even have Excel total up these bills for you and compare it to the amount you were paid that check. If not, do it on a calculator.

When he gets his first check of the month, our example person pays each of these 6 bills that are due with it.

So if the picture above represents our examples complete budget and all his bills (just an example, I know many basics like gasoline were not represented), than he owes $401 in bills from his first check of the month. He makes $992. So assuming he's budgeted everything, including going out, etc. he should be able to sock away $591 directly in the bank. If he does that each week, he's saved $1,650 at the end of the month, paid all his bills on time, and still enjoyed the things he usually does. And he's not wondering where all his money went, because it's all accounted for on his budget.

I like to determine an amount, even if all I could afford was $20, and budget that in as "savings". Then automatically deposit it like I'm paying a bill.

But what about week 3? His check isn't big enough to cover his house payment. This may have been a problem in the past, but now he's stored away $1,346 from his first two checks so this won't be a problem. No more late house payments from our budget master!

You can make this much more simple of course, or much more complicated. You don't have to have Excel, I've seen people make a budget on a piece of paper and it worked just as well. I like Excel because of the auto sum functions and the capability to plug new numbers in and see how it affects my budget. For instance, if I can cut my satellite bill by XX dollars, than I will have XX more I can put in savings.

Also you will obviously need to customize your budget so that you pay all your bills on time. I will leave that to you to figure out.

The important thing is that you do it. Tracking your money is the first and most important step to financial independance. Without it, I would still be drowning in credit card debt, wondering why I couldn't afford a house, and late on my payments. I cannot stress enough how important it is.